The mass migration to cloud computing is under way, and with it, new means of securing data and critical information. That movement has been creating headaches for some legacy cybersecurity firms, but not Fortinet (FTNT +1.33%). With half of the company's 2019 now in the books, this hybrid security service provider is singing a sweet tune to investors' ears.
Fortinet is ahead of the curve converting to the cloud
With computing moving to data centers and employee access proliferating across mobile devices, the cybersecurity landscape has changed and become more complicated. Simply throwing up protection around an office building isn't going to cut it anymore. A slew of fast-expanding cybersecurity offerings born in the cloud such as Zscaler, Okta, CrowdStrike, and iboss have been popping up to help keep new digital operations secure.
However, with most organizations around the globe operating a hybrid model -- with old legacy systems running alongside the new -- a cloud-only solution isn't necessarily the answer. Fortinet has been executing well in this space by adding new services in the cloud and marrying them to its other offerings, and it sees many of the upstarts out there as complementary instead of threats.
To wit, CEO Ken Xie had this to say on the second-quarter earnings call:
I think we are living more on the partner-side because some [applications] can fit into this scale or forward the traffic to the cloud or to there ... But some other application, you still need to have all these Edge device like SD-WAN (software-defined networking) to keeping the traffic forward to the cloud. Basically, they also need to deal with the local traffic and a lot of security issues we see with the infrastructure security, internal segmentation, that also cannot be addressed by this cloud approach. It's really the mixed infrastructure, hybrid solution.
Case in point, Fortinet said it continues to sign big six- and seven-figure deals with organizations in need of a hybrid solution. During the second quarter, deals worth over $1 million grew 28% year over year, and their average total value was up 37%. The largest deal was less than 2% of total billings, meaning Fortinet is well diversified and not reliant on any single customer.
Image source: Getty Images.
Earnings should be consistently in the double-digits
Fortinet put up 18% top-line growth in the second quarter, which led to a 42% rise in adjusted earnings per share. Part of the power behind the cybersecurity company's operating model is its increasing reliance on service rather than product-based sales, which carry a higher profit margin and contribute to the bottom line in a big way.
|
Metric |
6 Months Ended June 30, 2019 |
6 Months Ended June 30, 2018 |
Change |
|---|---|---|---|
|
Product revenue |
$353 million |
$309 million |
14% |
|
Gross profit margin |
56.6% |
57.3% |
(0.7 pp) |
|
Service revenue |
$642 million |
$531 million |
21% |
|
Gross profit margin |
86.2% |
85.3% |
0.9 pp |
Data source: Fortinet. Pp = percentage point.
Management said full-year 2019 revenue should be up about 17%, with service revenue specifically leading the charge with at least a 19% annual gain. With that specific segment producing well north of 80% gross margins and lifting the overall average, the bottom line should benefit from at least a double-digit gain as well. Thus, the migration to the cloud -- however long it takes -- is great news for Fortinet.
Don't sweat the trade war
Finally, the trade war between the U.S. and China, which has been a persistent worry for investors no matter how involved their business holdings may or may not be with the dispute. Such has been the case for Fortinet as well, since the company lists about a quarter of its business as coming from the Asia Pacific region. It also recently announced its integration with Alibaba's cloud ecosystem, putting security operations in China in the spotlight and raising questions as to whether additional taxes would take a bite out of results going forward.
CFO Keith Jensen commented on China on the earnings call:
China by itself has not been a large contributor to our business historically for the last several years. Regarding tariffs, we saw the announcement earlier today. This and double-checking on that, make sure that we are still fine with our guidance and we're very fine. We do have some production as I mentioned before that's done in China, but the majority is outside of China. And then I guess the last comment I would offer is that, for us, the Asia-Pac area is ... a very diverse geography covering many countries all the way from Australia, New Zealand, up through South Korea, Japan, Taiwan, etc.
Put simply, a further escalation in the economic battle between the two countries is a non-issue -- at least at this point. Though geopolitical tensions are heating up and threatening global growth, Fortinet's brand of cybersecurity looks like a solid bet going forward no matter what the powers that be decide to do about each other. Business security and data-loss prevention is simply too important in the digital age, giving the cybersecurity industry and Fortinet a strong tailwind for the foreseeable future.
