10-QPeriod: Q3 FY2019

Fortinet, Inc. Quarterly Report for Q3 Ended Sep 30, 2019

Filed October 31, 2019For Securities:FTNT

Summary

Fortinet, Inc. (FTNT) reported strong financial results for the nine months and third quarter ended September 30, 2019. Total revenue grew 21% year-over-year for the quarter and 19% for the nine-month period, driven by both product and service revenue. The company's Security Fabric platform continues to perform well, with significant growth in FortiGuard security subscriptions and FortiCare technical support. Operating income saw substantial increases, up 59% for the quarter and 55% for the nine months, indicating improved operational efficiency. The company maintains a healthy balance sheet with $2.14 billion in cash, cash equivalents, and investments. Deferred revenue, a key indicator of future revenue, increased by 15% to $1.95 billion, highlighting strong future revenue potential from services. Fortinet generated robust operating cash flow of $617.6 million for the nine months ended September 30, 2019, a 35% increase year-over-year, demonstrating strong cash generation capabilities. The company also continued its share repurchase program, repurchasing $117.4 million of common stock during the nine-month period.

Financial Highlights

52 data points
Beta

Revenue

$548.10M

77.4% Gross Margin

Net Income

$80.20M

14.6% Net Margin

EPS (Diluted)

$0.09

Total Assets

$3.55B

Cash & Equivalents

$1.18B

Free Cash Flow

$203.70M

Financial Statements
Beta
Revenue$548.10M
Cost of Revenue$124.10M
Gross Profit$424.00M
R&D Expenses$69.90M
Operating Expenses$323.40M
Operating Income$100.60M
Net Income$80.20M
EPS (Basic)$0.09
EPS (Diluted)$0.09
Shares Outstanding (Basic)856.50M
Shares Outstanding (Diluted)874.00M

Key Highlights

  • 1Total revenue for the third quarter of 2019 increased by 21% year-over-year to $547.5 million, with service revenue showing strong growth of 21%.
  • 2Product revenue also saw a healthy increase of 20% year-over-year for the quarter, reaching $197.1 million.
  • 3Operating income surged by 59% year-over-year to $100.0 million in the third quarter, demonstrating improved profitability.
  • 4Net income increased to $79.8 million ($0.46 per diluted share) for the third quarter, compared to $58.7 million ($0.33 per diluted share) in the prior year.
  • 5Cash, cash equivalents, and investments grew by 25% to $2.14 billion as of September 30, 2019.
  • 6Deferred revenue, representing future recognized revenue, increased by 15% to $1.95 billion, indicating strong future revenue potential.
  • 7Net cash provided by operating activities for the first nine months of 2019 was $617.6 million, a 35% increase compared to the same period in 2018.

Frequently Asked Questions

Fortinet's revenue is driven by both product sales (primarily FortiGate network security appliances) and service revenue (FortiGuard security subscriptions and FortiCare technical support). For the nine months ended September 30, 2019, product revenue was $549.7 million, an increase of 16% year-over-year, while service revenue was $992.1 million, an increase of 21% year-over-year. The strong growth in service revenue, which carries higher margins, is a positive sign for future profitability and recurring revenue.

Fortinet demonstrated strong operating leverage, with operating expenses as a percentage of revenue decreasing by three percentage points in the third quarter and two percentage points for the nine-month period compared to the prior year. This, combined with revenue growth, led to a significant increase in operating income, up 59% for the quarter and 55% for the nine months. This indicates effective cost management and operational efficiency.

Fortinet maintains a robust financial position with $2.14 billion in cash, cash equivalents, and investments as of September 30, 2019. The company generated $617.6 million in operating cash flow for the first nine months of 2019, a 35% increase year-over-year. Management believes its existing cash resources are sufficient to meet its needs for at least the next 12 months, supported by strong operating cash flow generation and a significant deferred revenue balance.

The 'Risk Factors' section details several risks, including the unpredictable nature of operating results due to factors like order timing, customer buying patterns, and competitive pressures. The company's reliance on channel partners and potential disruptions in supply chains are also noted. Additionally, the increasing complexity of cybersecurity threats and the need for continuous product innovation are ongoing challenges. Investors should closely monitor the company's ability to manage these risks while continuing to grow.