10-QPeriod: Q2 FY2017

Fortinet, Inc. Quarterly Report for Q2 Ended Jun 30, 2017

Filed August 2, 2017For Securities:FTNT

Summary

Fortinet, Inc. reported strong financial performance for the three and six months ended June 30, 2017. Total revenue increased by 17% and 18% respectively year-over-year, driven by significant growth in service revenue (up 26% and 27%). The company successfully transitioned from an operating loss in the prior year's comparable periods to generating operating income of $28.5 million and $33.9 million respectively. Cash flow from operations saw a substantial increase of 63% year-over-year for the six-month period, reaching $274.5 million. The company also maintained a robust cash position, with total cash, cash equivalents, and investments exceeding $1.46 billion. Fortinet continues to invest in research and development, which increased by 12% and 13% for the respective periods, to support product innovation. While sales and marketing expenses also saw an increase in absolute terms, they decreased as a percentage of revenue, indicating improved operational efficiency. The company also announced a significant increase to its share repurchase program, demonstrating confidence in its financial health and commitment to returning value to shareholders.

Financial Highlights

50 data points
Beta

Revenue

$363.50M

73.7% Gross Margin

Net Income

$23.00M

6.3% Net Margin

EPS (Diluted)

$0.03

Total Assets

$2.36B

Cash & Equivalents

$853.10M

Free Cash Flow

$144.80M

Financial Statements
Beta
Revenue$363.50M
Cost of Revenue$95.70M
Gross Profit$267.80M
R&D Expenses$51.20M
Operating Expenses$239.30M
Operating Income$28.50M
Net Income$23.00M
EPS (Basic)$0.03
EPS (Diluted)$0.03
Shares Outstanding (Basic)878.50M
Shares Outstanding (Diluted)898.50M

Key Highlights

  • 1Total revenue for Q2 2017 increased by 17% to $363.5 million, with service revenue showing strong growth of 26%.
  • 2Transition from operating loss in Q2 2016 to an operating income of $28.5 million in Q2 2017.
  • 3Cash flow from operating activities for the first six months of 2017 increased by 63% to $274.5 million.
  • 4Total cash, cash equivalents, and investments stood at $1.46 billion as of June 30, 2017.
  • 5Deferred revenue grew by 12% to $1.16 billion, indicating strong future revenue potential from services.
  • 6Increased investment in R&D by 12% for the quarter to support ongoing product innovation.
  • 7Expanded the share repurchase program authorization, signaling financial strength and commitment to shareholder returns.

Frequently Asked Questions

The primary driver of Fortinet's revenue growth is the significant increase in service revenue, which grew by 26% year-over-year for the quarter and 27% for the six-month period. This is attributed to the growing deferred revenue balance from FortiGuard security subscriptions and FortiCare technical support contracts, indicating a successful shift towards higher-margin, recurring revenue streams.

Fortinet is demonstrating improved operational efficiency. While research and development expenses increased to support innovation, and sales and marketing expenses rose in absolute terms, both decreased as a percentage of total revenue. General and administrative expenses also saw a slight decrease as a percentage of revenue, partly due to the completion of their ERP system implementation.

Fortinet maintains a strong liquidity position with $1.46 billion in cash, cash equivalents, and investments as of June 30, 2017. Furthermore, cash flow from operating activities saw a substantial increase of 63% year-over-year for the first six months of the year, reaching $274.5 million, indicating robust cash generation capabilities.

The company expanded its 2016 Share Repurchase Program, authorizing an additional $300.0 million, bringing the total authorization to $600.0 million through January 31, 2019. Fortinet expects to repurchase at least $150.0 million worth of stock in 2017.