What happened

Stock in cybersecurity company Fortinet, Inc. (NASDAQ:FTNT) surged 10.5% in May according to data from S&P Global Market Intelligence. The catalyst for the move appears to be a strong, but somewhat confusing, set of first-quarter results given at the start of the month.

The confusion stems from Fortinet starting its fiscal year by giving first-quarter and full-year guidance excluding the impact of the transition to the adoption of ASC 606, a new revenue recognition standard. However, the headline numbers from the first quarter included the impact of ASC 606 as did the updated full-year guidance.

A person holding a smartphone with a web and lock projected on top of it.

Image source: Getty Images.

So what

That said, the numbers were still very good -- revenue up 17%, and billings up 15% on a year over year basis -- and management's commentary implied a hike in underlying guidance. The following table helps explain matters.

As you can see below, revenue came in toward the high-end of previous guidance, but margin performance was notably ahead. It was a good result whichever way you look at it, just perhaps not the blowout quarter that it appears to be when comparing actual reported non-GAAP numbers with the previous guidance.

Fortinet

Q1 guidance

excluding ASC 606

Q1 actual

excluding ASC 606

Q1 actual non-GAAP (includes ASC 606)

Revenue

$387 million-$393 million

$392.6 million

$399 million

Gross Margin

75%-76%

76.7%

76.7%

Operating Margin

12%-13%

13.8%

17.7%

Diluted Net Income per Share

$0.21-$0.22

$0.26

$0.33

Data source: Company presentations. Q1 represents the first-quarter. 

Similarly, the change in full-year guidance deserves some introspection. The increase in formal earnings and margin guidance is dramatic. Nevertheless, when adjusted for the positive impact of the adoption of the new regulation, it's still an improvement from what management predicted a few months ago.

Fortinet Full-Year Guidance

At Q4 2017 (excluding ASC 606)

At Q1 2018 (including ASC 606)

Adjusted for ASC 606 Benefit

Revenue

$1.695 billion-$1.715 billion

$1.715 billion-$1.735 billion

N/A

Non-GAAP Gross Margin

75%-76%

75%-76%

N/A

Non-GAAP Operating Margin

17.7%-18%

20.2%-20.7%

17.7%-18.2%

Non-GAAP EPS

$1.30-$1.32

$1.51-$1.55

$1.32-$1.36

Data source: Company presentations.

Moreover, when asked about the benefit of ASC 606 on revenue guidance (an increase of $20 million on the bottom and high end of the range) on the earnings call, CFO Keith Jensen said, "I would not expect to see that one-time type change again in future quarters. That's why I'm guiding a lower impact on the revenue line going forward."

In other words, the first quarter saw a $6.4 million benefit from ASC 606, but full-year guidance was raised by $20 million. However, Jensen also said he expects a "lower impact" from the accounting change, so it's fair to assume that Fortinet's underlying assumption for revenue in 2018 has also been increased.

Now what

Despite the slightly confusing results and guidance, it's clear that Fortinet has a lot of growth potential, and it's on track for a year of good earnings growth. Furthermore, Fortinet has been expanding its salesforce in the last two quarters in order to fuel revenue growth, so don't be surprised if management exceeds its revenue targets in the coming quarters.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Fortinet. The Motley Fool has a disclosure policy.