Strong Product Sales Drive Fortinet's Revenue and Profit Higher

Cybersecurity company Fortinet (FTNT 1.74%) reported its second-quarter results after the market closed on Wednesday. Revenue growth accelerated on the back of strong demand for the company's hardware, and full-year guidance was increased to reflect the solid quarter and the expectation that the current product-refresh cycle will continue to drive growth. Here's what investors need to know about Fortinet's second-quarter report:

Fortinet results: The raw numbers

Data source: Fortinet.

What happened with Fortinet this quarter?

• Product revenue grew 17% from the prior-year period to $166.3 million. Service revenue was up 25% to $275 million.
• Total billings rose 20% to $513.4 million, while deferred revenue jumped 27% to $1.47 billion. Deferred revenue was $1.4 billion at the end of the first quarter, and $1.16 billion at the end of the second quarter of 2017.
• Fortinet produced operating cash flow of $142.2 million during the second quarter, down from $144.8 million in the prior-year period. Free cash flow was $130.6 million, up from $58.4 million.
• The company had cash, cash equivalents, and investments of $1.5 billion at the end of the second quarter, up from $1.39 billion at the end of the first quarter.
• Fortinet acquired Bradford Networks during the second quarter.
• $500 million was added to Fortinet's share repurchase program, on top of the $325.8 million already available.

Fortinet provided the following guidance:

• Third-quarter revenue is expected between $445 million and $455 million, with billings between $500 million and $515 million.
• Third-quarter non-GAAP earnings per share are expected between $0.41 and $0.43.
• Full-year revenue is expected between $1.77 billion and $1.79 billion, with billings between $2.085 billion and $2.110 billion. The company had previously guided for revenue between $1.715 billion and $1.735 billion.
• Full-year non-GAAP earnings per share are expected between $1.63 and $1.67. The company had previously guided for non-GAAP EPS between $1.51 and $1.55.

Image source: Fortinet.

What management had to say

CEO Ken Xie summed up the company's performance during the conference call: "The competitive advantage of our Security Fabric architecture coupled with our cloud offering and customer FortiASIC technology are contributing to market share gains. We expect to continue to deliver above-market growth, balanced with profitability."

CFO Keith Jensen briefly talked about the cloud-related business: "Cloud billings of our top-five public cloud providers continue to experience triple-digit growth."

Xie discussed where the company is in the current product cycle:

I think we do refresh our product every few years with whether the new ASIC, the new CPU, or some other better networking technology. The E-Series, more starting from the low end and then the middle and then the high end early this year gives us some of the benefit. But the refresh is not finished yet. It's only probably half or around half there.

Looking forward

Fortinet's revenue growth accelerated from the first quarter, driven by strong product sales growth. That growth is a function of the product refresh cycle, but Xie made clear that there are still benefits to come.

Fortinet boosted its revenue and earnings guidance for the full year, and it piled on another $500 million for share buybacks. The company's profitability is quickly improving as it grows, and with the cybersecurity market likely to grow for many years, Fortinet may be at just the beginning of its growth story.