Cybersecurity company Fortinet (NASDAQ:FTNT) reported its second-quarter results after market close on July 26. Revenue grew at a double-digit pace, with non-GAAP earnings soaring due to both that revenue growth and a slow rise in expenses. The company continued to make progress winning large enterprise contracts during the quarter, and it expects double-digit growth to persist during the third quarter. Here's what investors need to know about Fortinet's second-quarter report.

Fortinet results: The raw numbers

Metric

Q2 2017

Q2 2016

Year-Over-Year Change

Revenue

$363.5 million

$311.4 million

16.7%

Net income

$23.0 million

($1.4 million)

N/A

Non-GAAP EPS

$0.27

$0.14

92.9%

Data source: Fortinet.

Fortinet hardware.

Image source: Fortinet.

What happened with Fortinet this quarter?

A surge in service revenue drove Fortinet's top line higher, and the bottom line was helped along by a slow increase in operating expenses.

  • Fortinet produced service revenue of $220.8 million, up 26.3% year over year. Product revenue of $142.7 million rose just 4.5% year over year.
  • Billings increased by 14% year over year to $426.9 million.
  • Total deferred revenue stood at $1.16 billion at the end of the quarter, up 28.3% year over year.
  • Fortinet produced $144.8 million of cash from operations and $58.4 million of free cash flow. Free cash flow rose just 9% year over year, knocked down by $84.8 million spent on two office buildings in the Vancouver area.
  • Turning to the balance sheet, Fortinet had $1.46 billion of cash, cash equivalents, and investments at the end of the quarter, up slightly since the end of the first quarter.
  • Fortinet spent $33.2 million on share buybacks during the second quarter. The board of directors authorized an additional $300 million for buybacks, bringing to total available to $456 million.

Fortinet provided the following guidance for the third quarter and the full year:

  • Third-quarter revenue is expected to be between $367 million and $373 million, representing 16.7% year-over-year growth at the midpoint. Billings are expected to be between $417 million and $427 million.
  • Third-quarter non-GAAP EPS is expected to be between $0.22 and $0.23, compared to $0.18 in the prior-year period.
  • Full-year revenue is expected to be between $1.487 billion and $1.495 billion, up 17% year over year at the midpoint. Billings are expected to be between $1.775 billion and $1.795 billion.
  • Full-year non-GAAP EPS is expected to be between $0.94 and $0.96, compared to $0.73 during 2016.

What management had to say

Fortinet Chairman and CEO Ken Xie commented on the quarter: "Fortinet continues to exceed market growth rates, while delivering well against our margin improvement goals. The strength of the Fortinet Security Fabric positions us well to provide industry-leading protection for our customers against the aggressive threats that they face now and in the future wherever their assets and data are deployed: on premise or in the cloud."

Fortinet CFO Andrew Matto discussed the company's progress winning large enterprise deals during the company's conference call:

We had another good quarter in large enterprise deals. Year-over-year, the number of deals over $100,000 grew 21%. Deals over $250,000 grew 5%. Deals over $500,000 grew 10%, and deals over $1 million grew 25%. The majority of our large deals were attributable to the key differentiators of the Fabric, particularly manageability, orchestration and integration across the enterprise.

Matto also talked up the company's focus on serving government customers:

We again had a strong quarter in the government vertical, and we made some significant strides in the U.S. federal space. Two of our seven-figure deals in the quarter were Fabric deals with U.S. government organizations. The breakdown of billings across our top five verticals was: service provider at 18%, government at 15%, financial services at 13%, education at 10% and retail at 8%.

Looking forward

Fortinet continues to grow revenue at a double-digit pace, and its earnings are rising in part due to keeping costs in check. During the second quarter, total GAAP operating expenses rose just 3.6% year over year, leading the bottom line to soar.

Robust growth is already priced into the stock, which trades for roughly 4.7 times revenue guidance and 40 times non-GAAP EPS guidance. Fortinet will need to maintain its double-digit growth rate to keep investors happy.

Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Fortinet. The Motley Fool has a disclosure policy.