Fortinet Unscathed by China Slowdown

Cybersecurity company Fortinet (FTNT 3.93%) reported its fourth-quarter results after the market closed on Feb. 6. Revenue grew by more than 20% year over year, and adjusted earnings nearly doubled.

Fortinet expects growth to slow a bit in 2019, but management made clear that issues affecting other companies -- including a slowdown in China -- aren't hurting the company's results.

Fortinet results: The raw numbers

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

What happened with Fortinet this quarter?

• GAAP net income was boosted by a $90.5 million tax benefit during the fourth quarter.
• Product revenue was $200.8 million, up 23.9% year over year.
• Service revenue was $306.2 million, up 20.3% year over year.
• Total billings jumped 22% year over year to $649.2 million, while deferred revenue rose 26% to $1.69 billion.
• Fortinet produced cash flow from operations of $180.2 million and free cash flow of $168.6 million during the fourth quarter. Free cash flow was up from $143.9 million in the prior-year period.
• Fortinet repurchased 1.3 million shares for $92 million during the fourth quarter. The company spent $209.1 million on share repurchases in 2018.
• GAAP operating margin was 17%, while non-GAAP operating margin was 26%.

Image source: Fortinet.

What management had to say

Fortinet CFO Keith Jensen made clear that recent global developments had no effect on the company's results during the earnings call: "As our strong revenue growth illustrates, the partial U.S. federal government shutdown as well as concerns raised by Brexit and a slowing Chinese economy had no noticeable impact on our fourth-quarter performance."

Jensen cited diversification as the reason that none of these issues are causing problems: "I would note our government vertical is well-diversified and includes not only the U.S. federal government but also state, local, and international government agencies. Additionally, the U.K. and China are single countries within similarly diversified EMEA [Europe, the Middle East, and Africa] and APAC [Asia-Pacific] regions."

Jensen also mentioned some major deals signed during the quarter:

In the quarter, we closed a seven-figure transaction with a European global 2000 multinational financial services company to use our FortiGate products to focus on internal segmentation. Also, one of the $1-plus million wins last quarter was with a European-based supermarket chain that has 25% of the market share in the Netherlands. The combination of security and SD-WAN functionality into a single form factor drove this competitor displacement.

Check out all our earnings call transcripts.

Looking forward

Fortinet provided the following guidance for the first quarter of 2019 and for the full year:

• First-quarter revenue between $465 million and $475 million, up 17.8% year over year at the mid-point. Billings between $515 million and $535 million.
• First-quarter non-GAAP operating margin between 18% and 18.5%, and non-GAAP earnings per share between $0.37 and $0.39. Non-GAAP EPS was $0.33 in the first quarter of 2018.
• Full-year revenue between $2.06 billion and $2.10 billion, up 15.6% from 2018 at the midpoint. Service revenue is expected to be between $1.33 billion and $1.36 billion, and billings are expected to come in a range of $2.45 billion to $2.50 billion.
• Full-year non-GAAP operating margin between 22.5% and 23.5%, and non-GAAP earnings per share between $2.05 and $2.10. Non-GAAP EPS was $1.84 in 2018.

Fortinet's revenue growth is set to slow in 2019 compared to 2018, but the company's guidance still calls for solid double-digit growth on a revenue base that will exceed $2 billion this year. With the cybersecurity market forecast to grow by more than 10% annually through 2023, according to ResearchAndMarkets.com, Fortinet has no shortage of growth opportunities ahead of it.