10-QPeriod: Q3 FY2016

Fortinet, Inc. Quarterly Report for Q3 Ended Sep 30, 2016

Filed November 8, 2016For Securities:FTNT

Summary

Fortinet, Inc. (FTNT) reported robust revenue growth of 22% year-over-year for the third quarter of 2016, reaching $316.6 million. This growth was primarily driven by a strong performance in service revenue, which increased by 34%, outpacing product revenue growth. For the nine-month period, total revenue rose by 28% to $912.6 million, also led by a 37% increase in service revenue. The company's deferred revenue also saw a significant increase of 18% to $934.8 million, indicating strong future revenue potential. Cash, cash equivalents, and investments stood at $1.27 billion, reflecting healthy liquidity. While sales and marketing expenses increased to support growth initiatives, the company maintained its commitment to R&D investment to drive product innovation. Despite some regional sales execution challenges and macroeconomic headwinds, Fortinet demonstrated solid operational performance and a positive outlook. The company's strategic focus on expanding its Fortinet Security Fabric, enhancing its FortiGuard subscription services, and strengthening its FortiCare support offerings continues to drive recurring revenue and customer value. The acquisition of AccelOps in June 2016 further complements its offerings in network security visibility and threat intelligence. Fortinet's financial strength is underpinned by consistent operating cash flow generation of $244.7 million for the nine months ended September 30, 2016, and a healthy balance sheet. The company also announced an increase in its share repurchase program, signaling confidence in its financial position and commitment to shareholder returns.

Financial Highlights

51 data points
Beta

Revenue

$316.65M

73.2% Gross Margin

Net Income

$6.29M

2.0% Net Margin

EPS (Diluted)

$0.01

Total Assets

$2.01B

Cash & Equivalents

$647.51M

Free Cash Flow

$76.14M

Financial Statements
Beta
Revenue$316.65M
Cost of Revenue$84.80M
Gross Profit$231.85M
R&D Expenses$47.24M
Operating Expenses$226.36M
Operating Income$5.49M
Net Income$6.29M
EPS (Basic)$0.01
EPS (Diluted)$0.01
Shares Outstanding (Basic)866.67M
Shares Outstanding (Diluted)889.69M

Key Highlights

  • 1Total revenue increased 22% year-over-year to $316.6 million in Q3 2016.
  • 2Service revenue grew strongly by 34% year-over-year, outperforming product revenue growth.
  • 3Deferred revenue increased 18% to $934.8 million, indicating robust future revenue.
  • 4Cash, cash equivalents, and investments totaled $1.27 billion, demonstrating strong liquidity.
  • 5Operating cash flow for the nine months ended September 30, 2016, was $244.7 million.
  • 6Acquisition of AccelOps in June 2016 to enhance network security visibility and analytics.
  • 7Continued investment in R&D to support product innovation and technology leadership.

Frequently Asked Questions

Fortinet's revenue growth in Q3 2016 was primarily driven by a substantial increase in service revenue, which rose by 34% year-over-year. This was supported by strong sales of FortiGuard security subscriptions and FortiCare technical support contracts, as well as the recognition of revenue from its growing deferred revenue balance. While product revenue also saw an increase of 7%, it was somewhat limited by sales execution issues in North America and macroeconomic challenges in certain regions.

Fortinet increased its operating expenses, particularly in sales and marketing, by 28% in Q3 2016 compared to the prior year. This increase was largely due to accelerated hiring and investments aimed at expanding sales coverage, marketing capabilities, and product development. The company also continues to invest in research and development to maintain its technology leadership. While operating expenses as a percentage of revenue increased slightly, Fortinet expects the pace of expense growth to moderate in sales and marketing while R&D remains a strategic focus.

The significant increase in deferred revenue, up 18% to $934.8 million, is a positive indicator for future financial performance. Deferred revenue represents amounts invoiced for services not yet rendered, primarily from FortiGuard security subscriptions and FortiCare technical support contracts. This growing balance signifies a strong backlog of future revenue that will be recognized over the terms of these service contracts, providing a predictable revenue stream and contributing to financial stability.

Fortinet maintains a strong liquidity position with cash, cash equivalents, and investments totaling $1.27 billion as of September 30, 2016. The company generated $244.7 million in cash from operating activities for the nine months ended September 30, 2016, indicating healthy cash flow generation. Management believes its current cash and investments are sufficient to meet its anticipated cash needs for at least the next 12 months.