Fortinet (FTNT) Up 3.3% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Fortinet (FTNT). Shares have added about 3.3% in that time frame, underperforming 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 Q1 Earnings and Revenues Surpass Estimates

Fortinet delivered first-quarter 2020 non-GAAP earnings per share of 60 cents, which beat the Zacks Consensus Estimate by 20% and improved significantly from the year-ago quarter’s 46 cents.

Moreover, revenues of $576.9 million surpassed the consensus mark of $557 million and increased 22% year over year, driven by advanced FortiGate technology with SPU, integrated Security Fabric platform and hybrid multi-cloud offerings.

Strategic investments in developing powerful products and services, efforts to expand into adjacent addressable markets and increase its global sales force drove the performance.

Quarter in Detail

Segment-wise, Product revenues increased 18.2% year over year to $192.3 million. The growth was driven by the continued adoption of the FortiGate-based secure SD-WAN solution.

Services revenues rose 24.1% to $384.6 million.

Billings were up 21.1% to $667.8 million, driven by solid execution and growth across EMEA and APAC.

During the quarter, the company secured 38 total deals worth equal to or more than $1 million each.

The number of deals worth more than $250,000 rose 21.4% to 323 and the number of deals worth more than $500K was up 11.1% to 120.

Geographically, revenues in America were up 20.8%, APAC up 20.1% and EMEA up 24.5%.

Margins

Gross margin expanded 150 basis points (bps) year over year to 78.7%. Services gross margin expanded 30 bps to 87.4% as well as product gross margin grew 300 bps to 61.4%.

Non-GAAP operating income surged 33% to $128.4 million, while non-GAAP operating margin expanded 190 bps to 22.3%.

Balance Sheet & Cash Flow

Fortinet exited the reported quarter with cash and cash equivalents, and short-term investments of approximately $1.4 billion, down from $2.07 billion reported at the end of the previous quarter.

During the first quarter, the company generated operating cash flow of $319.4 million compared with $190.4 million in the previous quarter. Free cash flow was $241.8 million compared with $143.2 million in the fourth quarter of 2019.

In the first quarter, the company purchased approximately 10 million shares of common stock for $899.9 million.

Guidance

For the second quarter of 2020, the company expects revenues of $590-$605 million. Billings are estimated in a band of $700-$725 million.

Non-GAAP earnings per share are envisioned to be 64-66 cents.

Non-GAAP gross margin is expected in the range of 77.5-78.5%, whereas non-GAAP operating margin is anticipated between 23% and 24%.

Notably, the uncertainty surrounding the coronavirus pandemic may have a material negative impact on Fortinet’s second quarter and annual results.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, Fortinet has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, 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

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Fortinet has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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