10-QPeriod: Q3 FY2014

Fortinet, Inc. Quarterly Report for Q3 Ended Sep 30, 2014

Filed November 6, 2014For Securities:FTNT

Summary

Fortinet, Inc. reported solid revenue growth for the third quarter and first nine months of 2014, with total revenue increasing by 25% year-over-year for both periods. The company's performance was driven by increased sales volume across its FortiGate product family, particularly in entry-level and mid-range products for the quarter, and high-end products for the nine-month period. Services and other revenue also saw consistent growth, fueled by the expanding deferred revenue balance from subscription and support contracts. Financially, Fortinet demonstrated strong operational efficiency, with net cash provided by operating activities increasing by 60% for the nine months ended September 30, 2014, and robust free cash flow generation. The company's liquidity position remained strong, with a significant increase in cash, cash equivalents, and investments. Despite increased operating expenses, largely due to investments in sales and marketing to support growth, the company managed its cost structure effectively. Investors should note the slight decrease in gross margin, particularly for product revenue, attributed to a higher mix of lower-margin products and increased warranty costs.

Financial Highlights

50 data points
Beta

Revenue

$193.35M

70.6% Gross Margin

Net Income

$4.06M

2.1% Net Margin

EPS (Diluted)

$0.00

Total Assets

$1.31B

Cash & Equivalents

$258.10M

Free Cash Flow

$56.52M

Financial Statements
Beta
Revenue$193.35M
Cost of Revenue$56.88M
Gross Profit$136.46M
R&D Expenses$30.79M
Operating Expenses$121.01M
Operating Income$15.45M
Net Income$4.06M
EPS (Basic)$0.00
EPS (Diluted)$0.00
Shares Outstanding (Basic)821.47M
Shares Outstanding (Diluted)848.63M

Key Highlights

  • 1Total revenue grew 25% year-over-year for both the three and nine months ended September 30, 2014, reaching $193.3 million and $546.4 million, respectively.
  • 2Product revenue increased by 26% and 29% for the three and nine-month periods, respectively, driven by strong sales of FortiGate products.
  • 3Services and other revenue grew 24% and 22% for the respective periods, reflecting the expanding deferred revenue balance.
  • 4Deferred revenue increased by $67.4 million from December 31, 2013, to $500.0 million as of September 30, 2014, indicating strong future revenue visibility.
  • 5Net cash provided by operating activities surged by 60% to $161.2 million for the nine months ended September 30, 2014.
  • 6The company maintained a strong liquidity position, with cash, cash equivalents, and investments totaling $963.8 million.
  • 7Total gross margin slightly decreased by 1.0 percentage point for the quarter and 1.4 percentage points for the nine months, primarily due to a higher mix of entry-level products and increased warranty costs.

Frequently Asked Questions

Fortinet appears to be in strong financial health. The company is demonstrating consistent revenue growth across its product and service offerings, a significant increase in operating cash flow, and a solid liquidity position. Investments in sales and marketing are contributing to this growth, although they also lead to increased operating expenses.

While revenue is growing strongly, operating expenses have also increased, primarily due to investments in sales and marketing to drive future growth. The company has seen a slight decrease in gross margins, particularly on product revenue, due to a higher mix of lower-margin products and increased warranty costs. Despite these pressures, the significant increase in operating cash flow suggests effective management of overall profitability and cash generation.

The substantial increase in deferred revenue ($67.4 million from year-end 2013 to $500.0 million by September 30, 2014) is a positive indicator for future revenue. Deferred revenue represents amounts invoiced but not yet earned, primarily from services like FortiGuard subscriptions and FortiCare support. This growth suggests strong customer demand for Fortinet's recurring services and provides good visibility into future revenue streams.

The report mentions increased operating expenses related to sales and marketing investments. Additionally, there's a slight pressure on gross margins, particularly in product revenue. The company also faces risks common in the tech industry, such as intense competition, evolving technology, and potential impacts from economic conditions, though these are generally discussed in the context of risk factors rather than immediate financial distress.