10-QPeriod: Q3 FY2010

Fortinet, Inc. Quarterly Report for Q3 Ended Sep 30, 2010

Filed November 5, 2010For Securities:FTNT

Summary

Fortinet, Inc. reported strong financial performance for the third quarter and first nine months of 2010, indicating robust growth and improving operational efficiency. Total revenue saw a significant increase year-over-year, driven by strong product revenue growth and a substantial contribution from services revenue, which represents a recurring revenue stream. The company demonstrated improved operational leverage, with revenue growth outpacing the increase in sales and marketing expenses. This efficiency is also reflected in increased revenue per employee. The balance sheet shows a healthy increase in cash, cash equivalents, and investments, alongside positive cash flow from operations, highlighting the company's solid financial position and ability to fund future growth initiatives. Despite impressive top-line growth and improving profitability metrics, Fortinet faces ongoing risks including intense competition, evolving market dynamics, and a series of ongoing legal proceedings, particularly patent litigation. Investors should monitor the company's ability to continue its growth trajectory while effectively managing these operational and legal challenges.

Financial Highlights

26 data points
Beta

Revenue

$84.97M

74.8% Gross Margin

Net Income

$14.02M

16.5% Net Margin

EPS (Diluted)

$0.02

Cash & Equivalents

$77.14M

Free Cash Flow

$32.19M

Financial Statements
Beta
Revenue$84.97M
Cost of Revenue$21.44M
Gross Profit$63.53M
R&D Expenses$12.39M
Operating Expenses$45.37M
Operating Income$18.16M
Net Income$14.02M
EPS (Basic)$0.02
EPS (Diluted)$0.02
Shares Outstanding (Basic)718.36M
Shares Outstanding (Diluted)779.21M

Key Highlights

  • 1Total revenue increased by 29% year-over-year for the third quarter ($85.0M vs $65.9M) and by 27.4% for the first nine months ($231.1M vs $181.4M).
  • 2Product revenue saw substantial growth, up 40.6% year-over-year in Q3 ($35.9M vs $25.6M) and 35.7% for the first nine months ($94.1M vs $69.3M).
  • 3Services revenue, a key recurring revenue stream, grew by 21.3% year-over-year in Q3 ($44.5M vs $36.7M) and 22.0% for the first nine months ($124.1M vs $101.8M).
  • 4Gross margin improved to 74.8% in Q3 2010 from 73.5% in Q3 2009, driven by better product margins.
  • 5Operating income more than doubled year-over-year in Q3, rising to $18.2M from $9.7M, with operating margin expanding to 21.4% from 14.7%.
  • 6Cash, cash equivalents, and investments significantly increased to $352.3M as of September 30, 2010, from $260.3M as of December 31, 2009.
  • 7Net cash provided by operating activities was strong, increasing to $72.0M for the nine months ended September 30, 2010, from $45.8M in the prior year period.

Frequently Asked Questions

Fortinet is a leading provider of network security appliances and Unified Threat Management (UTM) solutions. The company generates revenue from two main sources: Product revenue, primarily from sales of its FortiGate appliances, and Services revenue, which includes subscription services (like antivirus and web filtering updates) and technical support (FortiCare). Services revenue is recognized over the term of the contract, contributing to a significant deferred revenue balance.

Fortinet demonstrated strong year-over-year growth. Total revenue increased by 29% to $85.0 million. Product revenue grew by 40.6%, and services revenue increased by 21.3%. Gross margin improved to 74.8%, and operating income more than doubled to $18.2 million, with operating margin expanding significantly to 21.4%.

Fortinet's financial position is strong. As of September 30, 2010, the company held $352.3 million in cash, cash equivalents, and investments. The company generated $72.0 million in cash from operating activities for the first nine months of 2010, a significant increase from the prior year, indicating healthy cash generation and financial flexibility.

Fortinet faces several risks, including intense competition in the network security market from larger players, the rapid evolution of technology and security threats, and a number of ongoing legal proceedings, particularly patent litigation (e.g., with Trend Micro and Palo Alto Networks). The company also relies heavily on its channel partners and faces challenges in managing inventory and the complexity of global operations.