Fortinet's Profits Rocket Higher

Cybersecurity company Fortinet (FTNT +0.20%) reported its third-quarter results after the market closed on Nov. 1.

While revenue grew at a solid double-digit pace, the bottom line soared. The company's margins are rapidly improving, and it sees continued earnings growth in the fourth quarter.

Fortinet results: The raw numbers

Data source: Fortinet. GAAP = generally accepted accounting principles.

What happened with Fortinet this quarter?

• Product revenue was $164.5 million, up 20% year over year.
• Service revenue was $289.4 million, up 22% year over year.
• Total billings rose 22% year over year to $527.5 million, while deferred revenue jumped 27% to $1.54 billion.
• Fortinet produced operating cash flow of $176.7 million and free cash flow of $158.5 million in the second quarter. Free cash flow in the prior-year period was $140.6 million.
• Fortinet acquired ZoneFox in October.

Fortinet provided the following guidance:

• Fourth-quarter revenue between $490 million and $500 million, up from $416.7 million in the prior-year period
• Fourth-quarter billings between $620 million and $635 million, up from $534 million in the prior-year period
• Fourth-quarter non-GAAP gross margin between 75% and 76%, and non-GAAP operating margin between 24% and 24.5%
• Fourth-quarter non-GAAP earnings per share between $0.50 and $0.52, up from $0.32 in the prior-year period
• Full-year revenue between $1.785 billion and $1.795 billion
• Full-year billings between $2.125 billion and $2.140 billion
• Full-year non-GAAP gross margin between 75% and 76%, and non-GAAP operating margin between 21.5% and 22%
• Full-year non-GAAP earnings per share between $1.72 and $1.76

Image source: Fortinet.

What management had to say

Fortinet CFO Keith Jensen reiterated the company's long-term margin target during the earnings call: "We remain committed to balancing above-market revenue growth with increasing profitability, as we work to achieve our non-GAAP operating margin goal of 25% for the full year 2022."

Jensen also detailed the company's success in winning large deals:

Illustrating the strength of our mid-enterprise and enterprise business, the number of deals over $250,000 grew 27%, while the billings associated with these deals increased 34%. Number of deals over $1 million were fairly consistent year over year, moving from 32 to 30. The total dollar billings associated with these $1 million-plus deals increased 32%.

Looking forward

Fortinet's revenue grew at about the same rate in the third quarter as it did in the second quarter. The company's fourth-quarter guidance calls for a bit of a slowdown, with the midpoint representing a growth rate of 18.8% year over year. But Fortinet boosted its full-year guidance for revenue and earnings.

Fortinet's bottom line exploded in the third quarter, and the company expects similar growth in the fourth quarter. Fortinet's margins are improving as it scales, a trend that should make investors very happy.