Why Is Fortinet (FTNT) Up 11.4% Since Its Last Earnings Report?

It has been about a month since the last earnings report for Fortinet, Inc. (NASDAQ:FTNT) . Shares have added about 11.4% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to its next earnings release, or is FTNT due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Fortinet Q4 Earnings Top, Revenue Growth Rate Dismal

Continuing with its upbeat performance for the sixth straight quarter, Fortinet recently reported better-than-expected results for fourth-quarter 2017, wherein revenues and earnings came ahead of the company’s expectations, and also surpassed the respective Zacks Consensus Estimate.

Fortinet’s non-GAAP earnings per share of 32 cents beat the Zacks Consensus Estimate of 29 cents. Also, earnings came in higher than management’s guidance range of 28-30 cents and marked an improvement over the year-ago quarter’s earnings of 30 cents, driven mainly by higher revenues which were partially offset by elevated operating expenses.

Quarter in Detail

Fortinet reported fourth-quarter revenues of $416.7 million, beating the Zacks Consensus Estimate of $409 million and up 14.8% year over year. Segment wise, Product revenues increased 2% year over year to $162.1 million, while Services revenues jumped 24.8% to $254.6 million. A large number of deal wins and customer additions during the reported quarter also proved conducive to top-line growth.

During the fourth quarter, the company witnessed 21% year-over-year growth in the number of deals worth more than $100,000, while the number of deals worth more than $250,000 and $500,000 climbed 31% and 24%, respectively.

Billings were up 15% on a year-over-year basis to $534 million.

Non-GAAP (excluding stock-based compensation and amortization of intangible assets) gross profit jumped 14.4% from the year-ago quarter to $313.9 million. However, gross margin contracted 40 basis points (bps) to 75.3%. It also came in below the mid-point of management’s expectation of 75-76% (mid-point 75.5%).

Furthermore, non-GAAP operating expenses jumped 21.6% year over year to $235.3 million. As a percentage of revenues, non-GAAP operating expenses advanced 320 bps year over year to 56.5%.

Non-GAAP operating profit declined 3% to $78.7 million from approximately $81.1 million recorded in the year-ago quarter. Non-GAAP operating profit margin contracted 350 bps to 18.9%, mainly due to lower gross margin and escalating operating expenses as a percentage of revenues which more than offset the benefit of higher revenues. Operating margin, however, came at the higher-end of the company’s guidance range of 18-19%.

Balance Sheet & Cash Flow

Fortinet exited the reported quarter with cash and cash equivalents, and short-term investments of approximately $1.25 billion, down from $1.28 billion recorded at the end of the third quarter. Accounts receivable were $346.2 million compared with $258 million witnessed at the end of the previous quarter.

During the year, the company generated operating cash flow of $594.4 million. Free cash flow for 2017 came in at $459.1 million. Fortinet bought back 11.2 million shares for $446.3 million during the year.

Guidance

Fortinet initiated outlook for first-quarter and full-year 2018.

The company’s forecasts for the first quarter are slightly lackluster. Management expects revenues in the range of $387-$393 million (mid point: $390 million). Billings are estimated in the range of $449-$457 million.

Non-GAAP earnings per share are anticipated to come in the band of 21-22 cents (mid point: 21.5 cents). The guidance range represents a year-over-year increase of 26.4%. Non-GAAP gross margin is estimated in the range of 75-76%, whereas non-GAAP operating margin is projected to be between 12% and 13%.

For 2018, management projects revenues in the range of $1.695-$1.715 billion (mid-point: $1.705 billion). Billings are forecast in the band of $2.030-$2.050 billion.

Nevertheless, the company anticipates that its cost-management initiatives will drive margins and earnings per share. Non-GAAP gross and operating margin projections are in the range of 75-76% and 17.7-18%, respectively.

Non-GAAP earnings per share are estimated to lie between $1.30 and $1.32 (mid-point $1.31).

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been three revisions higher for the current quarter compared to one lower. While looking back an additional 30 days, we can see even more upward momentum. There have been three moves up in the last two months.

Fortinet, Inc. Price and Consensus

Fortinet, Inc. Price and Consensus | Fortinet, Inc. Quote

VGM Scores

At this time, FTNT has an average Growth Score of C, however its Momentum is doing a lot better with an A. However, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for momentum investors than growth investors.

Outlook

Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. It comes with little surprise FTNT has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.