Fortinet Beats on Q1 Earnings & Rev - Analyst Blog

Fortinet Inc. FTNT reported first-quarter 2014 earnings per share of 5 cents, which came ahead of the Zacks Consensus Estimate by a penny. The quarter's earnings, which exclude the effect of amortization of intangibles but include stock-based compensation expenses, were however 29.4% lower than 7 cents reported in the year-ago quarter.

Revenues

Fortinet reported first-quarter revenues of $168.9 million, up 24.4% from the year-ago quarter. Revenues were above the Zacks Consensus Estimate of $158.0 million and the company's guided range of $155.0–$159.0 million.

The year-over-year improvement was aided by a 32.5% increase in Product revenues and an 18.4% increase in Services & other revenues.

Geographically, Americas (43.0% of total revenue) grew 38.0% from the year-ago quarter, EMEA (33.0% of total revenue) increased 20.0% from the year-ago quarter while Asia Pacific (constituting the remaining 24.0% of revenues) grew 11.0%on a year-over-year basis.

Billings

Billings during the quarter grew 26.4% on a year-over-year basis to $187.6 million. Number of deals worth over $100K was 247, up from 170 in the year-ago quarter. Deals over $250k increased to 78 from 55 in the year-ago period while deals over $500k were 32, up from 13 in the year-ago quarter.

Operating Results

Adjusted gross profit increased 22.3% from the year-ago quarter to $118.2 million. However, gross margin contracted 122 basis points year over year to 69.9%, primarily due to higher cost of services.

Higher-than-expected adjusted operating expenses (up 29.6% year over year) led to a decline in operating margin. Moreover, as a percentage of revenues, operating expenses increased 252 basis points, thereby impacting margins. Adjusted operating margin came in at 7.9%, down from 11.5% in the year-ago quarter.

Fortinet posted adjusted net income (excluding the effect of amortization of intangibles but include stock-based compensation expenses) on a proportionate tax basis of $8.8 million or 5 cents per share compared with $12.4 million or 7 cents in the year-ago quarter.

Balance Sheet & Cash Flow

Fortinet exited the first-quarter with cash and cash equivalents and short-term investments of $561.1 million, up from $491.4 million in the previous quarter. Accounts receivable were $111.5 compared with $130.5 million in the year-ago quarter.

Cash from operating activities was $60.9 million, up from $46.7 million in the previous quarter. Free cash flow in the first-quarter was $49.6 million. During the first quarter of 2014, the company repurchased $7.5 million worth of shares.

Guidance

For the second quarter of 2014, management expects revenues in the range of $169.0–$172.0 million, a 16.0% year-over-year increase at the mid-point. The Zacks Consensus Estimate is pegged at $168.0 million. Billings are expected in the range of $185.0 million to $190.0 million, up approximately 17.0% year over year.

Gross margin is expected in the range of 70.0%-71.0%. The company expects operating margin to be in the range of 13.0%-14.0%, diluted share count of approximately 168 million to 170 million and earnings per share to be approximately 10 cents.

Conclusion

Fortinet provides network security solutions, which include firewall, VPN, application control, antivirus, intrusion prevention, web filtering, anti-spam, and WAN acceleration. Fortinet reported better-than-expected first-quarter results, beating the Zacks Consensus Estimate on both counts, and provided an encouraging second-quarter guidance. Moreover, revenues increased year over year aided by an increase in its operating segments.

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 positives.

Currently, Fortinet has a Zacks Rank #2 (Buy).