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Fortinet (FTNT) Posts Loss in Q1; Up on Revenue Beat & View

Shares of Fortinet Inc. FTNT gained over 9% during yesterday’s after-hour trade following better-than-expected top-line results for first-quarter 2016 and an encouraging outlook for second-quarter and fiscal 2016.

Nevertheless, Fortinet’s bottom line results were quite disappointing. The network security solution provider’s adjusted loss per share (excluding one-time items but including stock-based compensation) of 6 cents compared unfavorably with the Zacks Consensus Estimate of a loss of 1 cent and came in contrast to the year-ago quarter earnings of 1 cent.

Revenues

Fortinet reported first quarter revenues of $284.6 million, up 33.7% from the year-ago quarter. Revenues beat the Zacks Consensus Estimate of $273 million and exceeded the guided range of $270–$275 million. Segment-wise, Product revenues jumped 27.8% year over year to $124.6 million, and Services and Other revenues surged 38.7% to $115.4 million.

The year-over-year improvement was primarily aided by strength in the network security market. A large number of deal wins and customer additions during the quarter also contributed to the robust top line.

Billings increased 30% on a year-over-year basis to $330 million.

Operating Results

Gross profit increased 38.5% from the year-ago quarter to $206.8 million. Moreover, gross margin expanded 260 basis points (bps) year over year to 72.7%, primarily due to sales of higher value subscription bundles.

Higher-than-expected adjusted operating expenses (up 40.1% year over year) affected operating results negatively. As a percentage of revenues, operating expenses increased 330 bps to 72.9%. Adjusted operating loss during the quarter came in at $787 million as against a profit of $114.2 million in the year-ago quarter.

Balance Sheet & Cash Flow

Fortinet exited the quarter with cash and cash equivalents and short-term investments of approximately $952.6 million, up from $891.4 million at the end of the previous quarter. Accounts receivable were $220.1 million compared with $259.6 million at the end of the fourth quarter.

During the quarter, the company generated cash flow of $100.6 million. Free cash flow for the quarter came in at $70.6 million. The company repurchased 2 million shares worth $50.0 million during the quarter.

Guidance

For the second quarter, management expects revenues in the range of $301–$306 million and earnings per share of roughly 14 cents. The Zacks Consensus Estimate for revenues and earnings are pegged at $300 million and 4 cents, respectively. Billings are expected to be in the range of $365 million to $370 million in the second quarter. Non-GAAP gross margin is expected to be approximately 73%, whereas, non-GAAP operating margin is expected to be around 12%.

Fortinet raised its 2016 guidance. The company now expects revenues in the range of $1.262 billion to $1.272 billion (previously $1.25 billion to $1.26 billion), representing a year-over-year increase of 26%. The revenue guidance is also above the Zacks Consensus Estimate of $1.253 billion. Earnings per share are now anticipated between 69 cents and 71 cents (previous guidance 67 cents and 69 cents), much higher than the Zacks Consensus Estimate of 25 cents.

Conclusion

Fortinet’s network security solutions include firewall, VPN, application control, antivirus, intrusion prevention, web filtering, anti-spam and WAN acceleration. The company reported mixed first-quarter results, wherein the top line beat the Zacks Consensus Estimate but the bottom line compared unfavorably with the same.

Nonetheless, we are encouraged by Fortinet’s second-quarter and fiscal 2016 guidance. Despite the persistent macro uncertainty, the company seems positive on the back of healthy network security market, solid product line-up and investment plans.

However, competition from key network security players such as Cisco Systems Inc. CSCO, Check Point CHKP, Juniper Networks JNPR and Palo Alto Networks, remains a concern. Nonetheless, product ramp-ups, deal wins, continuous growth in the network security market and expected benefits from the ongoing investments remain positives.

Currently, Fortinet has a Zacks Rank #3 (Hold).

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