10-QPeriod: Q3 FY2018

Fortinet, Inc. Quarterly Report for Q3 Ended Sep 30, 2018

Filed November 7, 2018For Securities:FTNT

Summary

Fortinet, Inc. reported strong financial performance for the nine months ended September 30, 2018, with total revenue reaching $1.29 billion, a 20% increase year-over-year. This growth was driven by both product revenue (up 14% to $473.6 million) and service revenue (up 24% to $820.6 million). The company demonstrated significant operating leverage, with operating income rising 116% to $145.9 million, leading to a substantial improvement in net income and diluted EPS. A key strategic highlight was the adoption of new revenue recognition standards (Topic 606), which impacted the timing of revenue and expense recognition, particularly related to sales commissions, resulting in a positive impact on reported operating income and a capitalization of deferred contract costs. The company's balance sheet remains robust, with cash, cash equivalents, and investments totaling $1.67 billion as of September 30, 2018, reflecting strong operating cash flow generation. Deferred revenue also saw a healthy increase, indicating future revenue potential. Fortinet continued its share repurchase program, demonstrating a commitment to returning value to shareholders. The company's strategic focus areas include expanding its Security Fabric, Cloud Security, and IoT/OT offerings, positioning it for continued growth in the cybersecurity landscape.

Financial Highlights

52 data points
Beta

Revenue

$453.90M

75.4% Gross Margin

Net Income

$58.70M

12.9% Net Margin

EPS (Diluted)

$0.07

Total Assets

$2.76B

Cash & Equivalents

$1.17B

Free Cash Flow

$158.50M

Financial Statements
Beta
Revenue$453.90M
Cost of Revenue$111.60M
Gross Profit$342.30M
R&D Expenses$58.70M
Operating Expenses$279.50M
Operating Income$62.80M
Net Income$58.70M
EPS (Basic)$0.07
EPS (Diluted)$0.07
Shares Outstanding (Basic)849.00M
Shares Outstanding (Diluted)878.50M

Key Highlights

  • 1Total revenue increased by 20% to $1.29 billion for the nine months ended September 30, 2018.
  • 2Service revenue outpaced product revenue growth, increasing by 24% to $820.6 million.
  • 3Operating income saw substantial growth of 116% to $145.9 million, driven by revenue growth and improved operating leverage.
  • 4The adoption of Topic 606 (Revenue Recognition) positively impacted reported operating income by capitalizing sales commissions and amortizing them over time.
  • 5Cash, cash equivalents, and investments grew by 24% to $1.67 billion, supported by strong operating cash flows.
  • 6Deferred revenue increased by 16% to $1.54 billion, signaling future revenue streams.
  • 7Fortinet repurchased $117.1 million of its common stock during the nine months ended September 30, 2018, as part of its ongoing share repurchase program.

Frequently Asked Questions

The adoption of Topic 606 on January 1, 2018, significantly impacted Fortinet's financials by changing the accounting for sales commissions. Previously expensed upfront, certain sales commissions related to service contracts are now capitalized and amortized over the contract period. This led to a $32.5 million decrease in sales and marketing expenses and a $45.1 million increase in operating income for the nine months ended September 30, 2018, compared to what would have been reported under the old standard. It also resulted in the creation of 'Deferred Contract Costs' on the balance sheet.

Service revenue continues to grow at a faster pace than product revenue. For the nine months ended September 30, 2018, service revenue increased by 24% to $820.6 million, while product revenue increased by 14% to $473.6 million. This shift indicates a growing contribution from recurring revenue streams like security subscriptions (FortiGuard) and technical support (FortiCare), which is generally viewed positively by investors due to its predictability.

Fortinet maintains a strong liquidity position. As of September 30, 2018, the company had $1.67 billion in cash, cash equivalents, and investments, an increase of 24% from the end of the previous year. The company generated $458.7 million in cash flow from operating activities for the nine months ended September 30, 2018. Fortinet also has $825.8 million remaining under its share repurchase program, indicating a balanced approach to capital allocation, prioritizing both reinvestment in the business and returning capital to shareholders.

Fortinet is focusing on several key growth areas: the Fortinet Security Fabric, which provides unified security across the digital attack surface; Cloud Security, offering solutions for securing cloud environments across major providers; and Internet of Things (IoT) and Operational Technology (OT) security, addressing the growing need to protect critical infrastructures and connected devices.