Fortinet Inc. (FTNT) reported decent fourth-quarter 2014 results wherein the top line registered significant year-over-year growth while the bottom line declined. The year-over-year decline in earnings per share was mainly due to higher operating expenses as a result of increased investments in research and development and marketing strategies.
On a GAAP basis, the company reported earnings of 4 cents per share compared with 7 cents in the year-ago quarter.
Revenues
Fortinet reported fourth-quarter revenues of approximately $224 million, up 26.3% from the year-ago quarter. Revenues beat the Zacks Consensus Estimate of $209 million as well as the company’s guided range of $206–$211 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 58.8% surge in Product revenues and 33.3% increase in Services & other revenues contributed to the year-over-year revenue growth.
Geographically, the Americas (41% of total revenue) increased 2% from the year-ago quarter, EMEA (38%) increased 43% year over year, while Asia Pacific (21%) grew 9% from fourth-quarter 2013.
Billings
Billings increased 35% on a year-over-year basis to $282.7 million and surpassed the company’s guidance range of $245–$250 million. Number of deals worth over $100K was 384, up from 260 in the year-ago quarter. Deals over $250K increased to 137 from 96 in the year-ago period while deals over $500K were 60, up from 37 a year ago.
Operating Results
Adjusted gross profit increased 28.2% from the year-ago quarter to $158.3 million. Moreover, gross margin expanded 110 basis points (bps) year over year to 70.7% and came in line with the company’s guidance range of 70–71%.
Higher-than-expected adjusted operating expenses (up 40.1% year over year) resulted in a decline in operating margin. As a percentage of revenues, operating expenses increased 610 bps to 61.8%, thereby impacting margins. Adjusted operating margin came in at 9%, down from 14.4% in the year-ago quarter.
Balance Sheet & Cash Flow
Fortinet exited 2014 with cash and cash equivalents and short-term investments of $720 million, up from $491.4 million at the end of 2013. Accounts receivable were $184.7 million compared with $130.5 million at the end of previous fiscal.
During 2014, the company generated cash flow of $196.6 million from operating activities compared with $147.4 million in 2013. Free cash flow was $164.4 million versus $133.5 million in 2013. During the year, the company repurchased $44 million shares.
Guidance
For the first quarter of 2015, management expects revenues in the range of $200–$205 million, a 20% year-over-year increase at the mid-point. The Zacks Consensus Estimate is pegged at $197 million. Billings are expected in the range of $226 to $230 million, up approximately 22% year over year at the mid-point.
Gross margin is expected in the range of 70–71%. The company expects operating margin to be approximately 7%, diluted share count to range within 171 to 173 million and earnings per share to be 6 cents, in line with the Zacks Consensus Estimate.
For 2015, management expects revenues in the range of $915–$925 million, a 20% year-over-year increase at the mid-point. The Zacks Consensus Estimate is pegged at $870 million. Billings are expected in the range of $1.065 to $$1.080 billion, up approximately 20% from last year.
Gross margin are expected to remain in the range of 70–71% and operating margin to come at approximately 14%. The company expects diluted share count in the range of 173 to 175 million and earnings per share within 49 to 50 cents, much higher than the Zacks Consensus Estimate of 33 cents.
Conclusion
Fortinet provides network security solutions, which include firewall, VPN, application control, antivirus, intrusion prevention, web filtering, anti-spam and WAN acceleration. The company reported decent fourth quarter results wherein the top line registered a significant year-over-year growth while the bottom line declined. However, the company provided encouraging first-quarter and fiscal 2015 guidance. Also, revenues grew year over year aided by decent performance by the operating segments.
Despite the continuing macro uncertainty, Fortinet seems positive on a healthy network security market, its product line-up 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 the concerns. However, we believe that product ramp ups, deal wins, continuous growth of the network security market and expected benefits from the ongoing investments are the positives.
Currently, Fortinet has a Zacks Rank #2 (Buy).
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