10-QPeriod: Q1 FY2014

Fortinet, Inc. Quarterly Report for Q1 Ended Mar 31, 2014

Filed May 7, 2014For Securities:FTNT

Summary

Fortinet, Inc. (FTNT) reported strong top-line growth in its first quarter of 2014, with total revenue reaching $168.9 million, a 24% increase year-over-year. This growth was driven by a robust 32% increase in product revenue to $76.8 million, alongside an 18% rise in services and other revenue to $92.2 million. The company also demonstrated significant operational efficiency, with operating income declining slightly to $12.8 million from $15.4 million in the prior year due to increased investments in sales and marketing and R&D, but cash flow from operations saw a substantial 60% increase, reaching $60.9 million. Fortinet's balance sheet remains healthy, with total assets growing to $1.2 billion and cash, cash equivalents, and investments standing at $888.3 million. Deferred revenue also saw a healthy increase, indicating strong future revenue potential. The company continues to invest in product development and sales expansion, which are key drivers for its future growth. Investors should note the increase in the effective tax rate from 28% to 39%, primarily due to limitations on foreign tax credits and the expiration of the R&D tax credit. Overall, the report showcases a company experiencing solid revenue expansion and improved cash generation, while strategically investing for continued growth.

Financial Highlights

50 data points
Beta

Revenue

$168.95M

70.0% Gross Margin

Net Income

$8.39M

5.0% Net Margin

EPS (Diluted)

$0.01

Total Assets

$1.20B

Cash & Equivalents

$172.97M

Free Cash Flow

$60.90M

Financial Statements
Beta
Revenue$168.95M
Cost of Revenue$50.74M
Gross Profit$118.21M
R&D Expenses$29.05M
Operating Expenses$105.39M
Operating Income$12.81M
Net Income$8.39M
EPS (Basic)$0.01
EPS (Diluted)$0.01
Shares Outstanding (Basic)811.96M
Shares Outstanding (Diluted)840.57M

Key Highlights

  • 1Total revenue increased by 24% to $168.9 million in Q1 2014 compared to Q1 2013.
  • 2Product revenue grew by 32% to $76.8 million, while Services and other revenue increased by 18% to $92.2 million.
  • 3Net income decreased to $8.4 million ($0.05/share) from $12.2 million ($0.07/share) in the prior year, impacted by increased operating expenses.
  • 4Cash, cash equivalents, and investments increased by $45.3 million to $888.3 million.
  • 5Cash flow from operating activities significantly improved, increasing by 60% to $60.9 million.
  • 6Deferred revenue increased by $18.7 million to $451.3 million, indicating strong future revenue potential.
  • 7Operating expenses increased by 30% year-over-year, driven by investments in sales and marketing (+35%) and R&D (+25%).

Frequently Asked Questions

Fortinet reported total revenue of $168.9 million for the three months ended March 31, 2014, a 24% increase compared to the same period last year. Product revenue grew 32% to $76.8 million, and Services and other revenue increased by 18% to $92.2 million.

The company's liquidity remains strong. Cash, cash equivalents, and investments stood at $888.3 million as of March 31, 2014, an increase of $45.3 million from the end of the previous year. Furthermore, Fortinet generated robust cash flow from operations, which rose by 60% to $60.9 million during the quarter, indicating healthy operational cash generation.

Operating expenses increased by 30% year-over-year. This increase was primarily driven by accelerated hiring to support growth, with significant investments in sales and marketing (up 35%) to expand sales coverage and marketing campaigns, and in research and development (up 25%) for new product development and enhancements. Headcount grew from 2,077 to 2,389.

Deferred revenue increased by $18.7 million from December 31, 2013, to $451.3 million as of March 31, 2014. This increase, primarily from subscription and support service contracts, is a positive indicator as it represents revenue that will be recognized in future periods, providing good visibility into future financial performance.