Fortinet Inc. (FTNT) reported third-quarter 2014 adjusted earnings per share of 3 cents, which missed the Zacks Consensus Estimate by a couple of cents. The quarter’s earnings, which exclude the effect of amortization of intangibles but include stock-based compensation expenses, were also down from 7 cents reported in the year-ago quarter.
Nonetheless, shares of Fortinet went up 1% yesterday, primarily due to a strong year-over-year increase in revenues and a positive guidance that indicate enhanced growth prospects for all the segments.
Revenues
Fortinet reported third-quarter revenues of $193.3 million, up 24.9% from the year-ago quarter. Revenues were above the Zacks Consensus Estimate of $184 million and the company’s guided range of $182–$185 million.
The year-over-year improvement was primarily aided by solid yield on sales and marketing strategies and a strong network security market. Moreover, a 25.9% increase in Product revenues and a 24.2% increase in Services & other revenues also supported year-over-year growth in revenues.
Geographically, Americas (43% of total revenue) increased 26% from the year-ago quarter, EMEA (34% of total revenue) increased 29% from the year-ago quarter while Asia Pacific (constituting the remaining 23% of revenues) grew 19% on a year-over-year basis.
Billings
Billings during the quarter increased 29% on a year-over-year basis to $231.2 million. Number of deals worth over $100K was 276, up from 187 in the year-ago quarter. Deals over $250K increased to 90 from 61 in the year-ago period while deals over $500K were 35, up from 19 in the year-ago quarter.
Operating Results
Adjusted gross profit increased 23.2% from the year-ago quarter to $136.5 million. However, gross margin contracted 102 basis points year over year to 70.6%, primarily due to higher cost of services.
Higher-than-expected adjusted operating expenses (up 30.8% year over year) resulted in a decline in operating margin. Moreover, as a percentage of revenues, operating expenses increased 280 basis points, thereby impacting margins. Adjusted operating margin came in at 8.1%, down from 12.1% 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 $5.3 million or 3 cents per share compared with $11.4 million or 7 cents in the year-ago quarter.
Balance Sheet & Cash Flow
Fortinet exited the third-quarter with cash and cash equivalents and short-term investments of $660.6 million, up from $558.1 million in the previous quarter. Accounts receivable were $116.4 compared with $127.8 million in the year-ago quarter.
Cash from operating activities was $56.5 million, down from $104.7 million in the previous quarter. Free cash flow in the third-quarter was $50.7 million. During the third quarter of 2014, the company repurchased $10.7 million worth of shares.
Guidance
For the fourth quarter of 2014, management expects revenues in the range of $206–$211 million, an 18% year-over-year increase at the mid-point. The Zacks Consensus Estimate is pegged at $208 million. Billings are expected in the range of $245 million to $250 million, up approximately 18% year over year.
Gross margin is expected in the range of 70%-71%. The company expects operating margin to be approximately 16%, diluted share count to be approximately 170 million to 172 million and earnings per share to be in the range of 13 cents to 14 cents, higher than the Zacks Consensus Estimate of 9 cents.
Management raised its fiscal 2014 revenue guidance. For fiscal 2014, management now expects revenues in the range of $752–$757 million, a 23% year-over-year increase at the mid-point. The Zacks Consensus Estimate is pegged at $753 million. Billings are expected in the range of $859 million to $864 million, up approximately 26% year over year.
Gross margin and operating margin for fiscal 2014 are expected to be approximately 71% and 16%, respectively. The company expects diluted share count to be approximately 169 million to 170 million and earnings per share to be in the range of 47 cents to 48 cents, much higher than the Zacks Consensus Estimate of 26 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 mixed third-quarter results, wherein the top line came ahead of the Zacks Consensus Estimate while the bottom line missed the same. However, the company provided an encouraging fourth-quarter and fiscal 2014 guidance. Also, 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 in research and development 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 believe that product ramps, deal wins, continuous growth of the network security market and expected benefits from the ongoing investments are positives.
Currently, Fortinet has a Zacks Rank #3 (Hold).
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