10-QPeriod: Q3 FY2017

Fortinet, Inc. Quarterly Report for Q3 Ended Sep 30, 2017

Filed November 2, 2017For Securities:FTNT

Summary

Fortinet, Inc. reported solid financial performance for the nine months ending September 30, 2017, with total revenue reaching $1.08 billion, an 18% increase year-over-year. This growth was primarily driven by a strong performance in service revenue, which increased by 27% to $663.2 million, outpacing product revenue growth of 7%. The company demonstrated significant operational improvements, with operating income turning positive to $67.6 million for the nine-month period, a substantial improvement from an operating loss of $2.2 million in the prior year. This profitability improvement was supported by an increase in gross margin to 74.0% and effective management of operating expenses, which decreased as a percentage of revenue. The company also maintained a strong liquidity position, with total cash, cash equivalents, and investments growing to $1.52 billion, and generated robust operating cash flow of $436.9 million. Fortinet continues to invest in research and development and sales and marketing to fuel future growth while also actively returning capital to shareholders through a significant share repurchase program.

Financial Highlights

50 data points
Beta

Revenue

$374.20M

75.0% Gross Margin

Net Income

$26.70M

7.1% Net Margin

EPS (Diluted)

$0.03

Total Assets

$2.40B

Cash & Equivalents

$905.80M

Free Cash Flow

$162.40M

Financial Statements
Beta
Revenue$374.20M
Cost of Revenue$93.60M
Gross Profit$280.60M
R&D Expenses$53.50M
Operating Expenses$246.90M
Operating Income$33.70M
Net Income$26.70M
EPS (Basic)$0.03
EPS (Diluted)$0.03
Shares Outstanding (Basic)877.50M
Shares Outstanding (Diluted)895.00M

Key Highlights

  • 1Total revenue grew 18% year-over-year to $1.08 billion for the first nine months of 2017, driven by strong service revenue growth (+27%).
  • 2Operating income improved significantly, turning positive to $67.6 million for the nine-month period, compared to a loss of $2.2 million in the prior year.
  • 3Total gross margin increased to 74.0% for the nine-month period, primarily due to higher-margin service revenue.
  • 4Cash, cash equivalents, and investments increased by 16% to $1.52 billion as of September 30, 2017.
  • 5Operating cash flow was strong, generating $436.9 million for the nine months ended September 30, 2017, a 79% increase year-over-year.
  • 6Deferred revenue continued to grow, reaching $1.22 billion, indicating strong future revenue potential.
  • 7The company repurchased $124.0 million of its common stock during the first nine months of 2017 and had $365.2 million available under its share repurchase program as of September 30, 2017.

Frequently Asked Questions

Fortinet demonstrates a healthy financial position. Revenue is growing steadily, driven by the high-margin services segment. The company has turned profitable, showing significant improvement in operating income. Liquidity is strong with substantial cash reserves, and the company is generating robust operating cash flow, allowing for continued investment in growth and capital returns to shareholders.

Revenue growth is primarily driven by the company's service offerings, including FortiGuard and FortiCare subscription services. Service revenue increased by 27% year-over-year for the nine months ended September 30, 2017. This indicates a successful shift towards a recurring revenue model, which typically carries higher margins and provides more predictable income streams.

Fortinet has effectively managed its expenses, leading to a significant improvement in profitability. Operating expenses as a percentage of revenue decreased, particularly in sales and marketing and general and administrative areas. This, combined with an improved gross margin, has resulted in a substantial increase in operating income and a positive swing from a loss to a profit for the nine-month period.

Fortinet is actively returning capital to shareholders through its share repurchase program. During the first nine months of 2017, the company repurchased $124.0 million of its common stock. As of September 30, 2017, there was $365.2 million remaining under the authorized repurchase program, and a further increase to the program was approved in October 2017, indicating a commitment to shareholder value.