Fortinet(FTNT) Up 9.3% Since Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Fortinet, Inc. FTNT. Shares have added about 9.3% in that time frame, outperforming the market.

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

Fortinet Beats Q4 Earnings; Issues Robust Outlook

Fortinet ended 2016 on a strong note with better-than-expected results for the fourth quarter of 2017. The company’s top- and bottom-line results also reflected year-over-year growth.

The network security solution provider’s adjusted earnings per share (excluding one-time items but including stock-based compensation) came in at $0.18, higher than the Zacks Consensus Estimate of $0.08. Moreover, on a year-over-year basis, the company’s adjusted earnings jumped six folds driven mainly by strong top-line growth and better cost management.

Revenues

Fortinet reported fourth-quarter revenues of $362.8 million, up 22.4% year over year, and beat the Zacks Consensus Estimate of $352 million. Segment-wise, Product revenues increased 9.8% year over year to $158.9 million, while Services revenues surged 34.4% to $203.9 million.

The year-over-year improvement was primarily aided by seasonal demand, improvements in sales productivity and success in selling multiple product deployments. A large number of deal wins and customer additions during the quarter also contributed to top-line growth.

During the quarter, Fortinet added over 10,000 customers, bringing the total count to over 300,000.The company witnessed 27% year-over-year growth in the number of deals worth over $100,000, while the number of deals worth over $250,000 and $500,000 increased 24% and 31%, respectively.

Billings were up 22% on a year-over-year basis to $463.4 million.

Operating Results

Gross profit increased 26.7% from the year-ago quarter to $271.9 million. Moreover, gross margin expanded 250 basis points (bps) to 74.9%, primarily backed by sales of higher-value subscription bundles.

Furthermore, the company has efficiently managed its operating expenses this quarter. As a percentage of revenues, adjusted operating expenses (excluding one-time items but including stock-based compensation) contracted 440 bps year over year to 61.4%. In dollar terms, however, it increased 14.3% to $222.9 million.

Adjusted operating profit jumped two and half folds to $49 million from $19.5 million in the year-ago quarter. Adjusted operating profit margin expanded 660 bps to 13.5% mainly due to improved gross margin and efficient cost management.

Adjusted net income jumped over six folds year over year to $31.8 million from the year-ago quarter level of $5.3 million.

Balance Sheet & Cash Flow

Fortinet exited the quarter with cash and cash equivalents, and short-term investments of approximately $1.09 billion, up from $1.03 billion at the end of the previous quarter. Accounts receivable were $313 million, compared with $239 million at the end of the third quarter.

During the quarter, the company generated operating cash flow of $101 million. Free cash flow for the quarter came in at $84.2 million. In 2016, the company generated operating cash flow of $345.7 million and free cash flow of $278.5 million.

During the fourth quarter, Fortinet repurchased shares worth $35.8 million, while in the full year, total share buyback under its current authorization was $110.8 million.

Guidance

Buoyed by a better-than-expected fourth-quarter performance, Fortinet provided a strong outlook for the first quarter 2017 and the full year.

For the first quarter, management expects revenues in the range of $330–$335 million (mid point: $332.5 million) and non-GAAP earnings per share of $0.15–$0.16 (mid point: $0.155). Billings are expected in the range of $380 million to $388 million. Non-GAAP gross margin is expected to be 74–75%, whereas non-GAAP operating margin is expected to be between 11% and 12%.

For 2017, management expects revenues in the range of $1.470–$1.480 billion (mid point: $1.475 billion) and non-GAAP earnings per share of $0.87–$0.89 (mid point: $0.88). Billings are expected in the range of $1.750 billion to $1.770 billion. Non-GAAP gross margin is projected to be 74–75%, whereas non-GAAP operating margin is anticipated to improve to 16%.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There has been one downward revision for the current quarter. In the past month, the consensus estimate has shifted by 8.33% due to these changes.

Fortinet, Inc. Price and Consensus

 

Fortinet, Inc. Price and Consensus | Fortinet, Inc. Quote

VGM Scores

At this time, Fortinet's stock has a strong Growth Score of 'A', though it is lagging a bit on the momentum front with a 'C'. However, the stock was allocated a grade of 'F' on the value side, putting it in the lowest quintile for this investment strategy.

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

Our style scores indicate that the stock is more suitable for growth investors than momentum investors.

Outlook

While estimates have been broadly trending downward for the stock, the magnitude of this revision has been net zero. Notably, the stock has a Zacks Rank #1 (Strong Buy). We are looking for an above average return from the stock in the next few months.

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