10-QPeriod: Q2 FY2018

Fortinet, Inc. Quarterly Report for Q2 Ended Jun 30, 2018

Filed August 7, 2018For Securities:FTNT

Summary

Fortinet, Inc. reported strong financial performance for the second quarter of 2018, with total revenue reaching $441.3 million, a 21% increase year-over-year. This growth was driven by both product revenue (up 17%) and service revenue (up 25%), indicating robust demand for its cybersecurity solutions across its diverse product portfolio, including the expanding Fortinet Security Fabric and cloud security offerings. The company demonstrated significant operational leverage, with operating income soaring by 78% to $50.7 million. This improvement was partly attributed to the adoption of the new revenue recognition standard (Topic 606), which positively impacted operating expenses, particularly sales and marketing, by capitalizing certain commissions. Fortinet also maintained a healthy cash position, with cash, cash equivalents, and investments totaling $1.50 billion, and generated substantial operating cash flow of $282.0 million for the first six months of the year. The company also continued its share repurchase program, demonstrating a commitment to returning capital to shareholders.

Financial Highlights

52 data points
Beta

Revenue

$441.30M

74.4% Gross Margin

Net Income

$49.30M

11.2% Net Margin

EPS (Diluted)

$0.06

Total Assets

$2.58B

Cash & Equivalents

$972.10M

Free Cash Flow

$130.70M

Financial Statements
Beta
Revenue$441.30M
Cost of Revenue$113.10M
Gross Profit$328.20M
R&D Expenses$61.20M
Operating Expenses$277.50M
Operating Income$50.70M
Net Income$49.30M
EPS (Basic)$0.06
EPS (Diluted)$0.06
Shares Outstanding (Basic)843.00M
Shares Outstanding (Diluted)867.50M

Key Highlights

  • 1Total revenue increased by 21% year-over-year to $441.3 million in Q2 2018.
  • 2Service revenue showed strong growth of 25%, driven by FortiCare and FortiGuard subscriptions.
  • 3Operating income surged by 78% to $50.7 million, reflecting improved operational efficiency.
  • 4The adoption of Topic 606 positively impacted operating expenses, notably reducing sales and marketing costs as a percentage of revenue.
  • 5Cash, cash equivalents, and investments remained strong at $1.50 billion as of June 30, 2018.
  • 6Generated $282.0 million in cash from operating activities for the first six months of 2018.
  • 7Completed a business acquisition of Bradford Networks, Inc. to enhance its network access control capabilities.

Frequently Asked Questions

The adoption of Topic 606, the new revenue recognition standard, had a significant impact, particularly on operating expenses. It allowed Fortinet to capitalize certain sales commissions on service contracts, amortizing them over time rather than expensing them upfront. This reduced sales and marketing expenses, positively impacting operating income and margins. For the three months ended June 30, 2018, this benefit was $11.8 million in sales and marketing expenses, leading to a 3.8 percentage point improvement in operating margin. For the six months ended June 30, 2018, the benefit was $23.5 million, leading to a 4.0 percentage point improvement in operating margin.

Fortinet's deferred revenue increased by 10% from December 31, 2017, to $1.47 billion as of June 30, 2018. This increase is primarily driven by the strong performance and sales growth of its service offerings, specifically FortiGuard security subscriptions and FortiCare technical support services. Deferred revenue represents future revenue that has been billed but not yet recognized, and its growth indicates a healthy and growing backlog of service contracts, providing visibility into future revenue streams.

Fortinet demonstrated significant improvement in profitability. For the three months ended June 30, 2018, operating income increased by 78% to $50.7 million, and net income more than doubled to $49.3 million compared to $23.0 million in the prior year. For the six months ended June 30, 2018, operating income increased by 145% to $83.1 million, and net income increased substantially to $90.9 million from $33.7 million in the same period last year. This enhanced profitability was driven by revenue growth, improved gross margins, and the impact of Topic 606 on operating expenses.

Fortinet acquired Bradford Networks, Inc. on June 4, 2018, for a preliminary purchase price of $6.8 million. The acquisition is expected to enhance Fortinet's Security Fabric by adding network access control capabilities, allowing for assessment and response to devices accessing the network, including IoT devices. The acquisition's impact on the consolidated financial statements was deemed not material for pro forma reporting purposes.