10-QPeriod: Q1 FY2015

Fortinet, Inc. Quarterly Report for Q1 Ended Mar 31, 2015

Filed May 1, 2015For Securities:FTNT

Summary

Fortinet, Inc. reported solid revenue growth in the first quarter of 2015, with total revenue increasing by 26% year-over-year to $212.9 million. Both product and service revenues saw significant increases, up 27% and 25% respectively. This growth was driven by increased demand across all product categories, particularly high-end FortiGate appliances, and continued strength in key geographic regions like EMEA and the Americas. The company maintained a strong financial position, with cash, cash equivalents, and investments growing to $1.07 billion. Deferred revenue also increased, indicating a healthy pipeline for future service revenue recognition. While operating expenses rose, primarily due to investments in sales, marketing, and R&D to support growth and product development, the company generated robust operating cash flow of $64.6 million. Management highlighted strategic investments in sales capacity and marketing as key drivers for market share gains and customer acquisition.

Financial Highlights

50 data points
Beta

Revenue

$212.89M

70.1% Gross Margin

Net Income

$1.56M

0.7% Net Margin

EPS (Diluted)

$0.00

Total Assets

$1.50B

Cash & Equivalents

$386.35M

Free Cash Flow

$64.62M

Financial Statements
Beta
Revenue$212.89M
Cost of Revenue$63.60M
Gross Profit$149.28M
R&D Expenses$35.82M
Operating Expenses$148.39M
Operating Income$898K
Net Income$1.56M
EPS (Basic)$0.00
EPS (Diluted)$0.00
Shares Outstanding (Basic)840.38M
Shares Outstanding (Diluted)868.60M

Key Highlights

  • 1Total revenue increased by 26% to $212.9 million for the three months ended March 31, 2015, compared to the same period last year.
  • 2Product revenue grew by 27% to $97.5 million, and Service revenue grew by 25% to $115.4 million.
  • 3Cash, cash equivalents, and investments increased by 8% to $1.07 billion.
  • 4Deferred revenue rose by 7% to $600.2 million, indicating a strong future revenue pipeline.
  • 5Operating income saw a significant decrease from $12.8 million in Q1 2014 to $0.9 million in Q1 2015, largely due to increased operating expenses.
  • 6Net income decreased substantially to $1.6 million ($0.01 per diluted share) from $8.4 million ($0.05 per diluted share) in the prior year's quarter.
  • 7Sales and Marketing expenses increased significantly by 49% to support growth initiatives.

Frequently Asked Questions

Fortinet's revenue growth in Q1 2015 was primarily driven by increased sales volume across its FortiGate product family, supported by higher demand across all product categories (entry-level, mid-range, and high-end). Growth was also strong in key geographic regions, particularly EMEA and the Americas, reflecting successful sales capacity expansion and marketing investments.

Operating expenses increased significantly by 41% to $148.4 million. This increase was primarily driven by a 49% rise in sales and marketing expenses to support growth initiatives and market share gains, as well as increased research and development costs for new product development. This rise in operating expenses, coupled with a slight increase in cost of revenue, led to a substantial decrease in operating income from $12.8 million in the prior year to $0.9 million in the current quarter, and consequently, a sharp decline in net income.

The increase in deferred revenue to $600.2 million signifies a healthy pipeline of future revenue. Deferred revenue primarily represents unearned revenue from FortiGuard security subscription and FortiCare support service contracts. As these services are recognized over time, a growing deferred revenue balance indicates a growing customer base and recurring revenue stream for future periods.

Fortinet maintained a strong liquidity position, with total cash, cash equivalents, and investments reaching $1.07 billion. The company generated $64.6 million in cash flow from operating activities, demonstrating solid cash generation capabilities. Investing activities primarily involved managing its investment portfolio, with maturities exceeding purchases. Financing activities included proceeds from stock issuances, partially offset by tax payments related to equity awards. Management expects existing cash to be sufficient for at least the next 12 months.