Once more, Fortinet posted solid results. Fourth-quarter revenue and non-GAAP (adjusted) earnings per share exceeded guidance, and management maintained its medium-term outlook that corresponds to strong double-digit annual revenue growth. Here are three keys to the cybersecurity specialist's solid earnings.

1. Impressive revenue growth

During the fourth quarter, revenue increased to $614.4 million, up 21% year over year and above the guidance range of $595 million to $610 million. This growth rate was consistent across all products and services and all geographies. Even more impressive, in contrast with many other cybersecurity vendors that have been struggling with their hardware and related software offerings, Fortinet showed strong growth in that segment (usually named "product"). 

Company Name Last-Quarter Product Revenue Growth (YOY)
Fortinet (NASDAQ:FTNT) 19%
Palo Alto Networks  (3.9%)
Check Point Software Technologies  (1.7%)
FireEye  (16%)

Data sources: Fortinet, Palo Alto Networks, Check Point, and FireEye. YOY = year over year.

The strong total revenue growth was partly due to the company's fabric platform that regroups many security features such as endpoint protection and application security into one integrated product. This platform also integrates third-party applications, which simplify the management of various cybersecurity solutions from many vendors. 

Looking forward, management confirmed its medium-term total revenue growth outlook -- above 15% annually by 2022 -- it announced during the analyst day in November. This forecast indicates revenue growth will decelerate. But given Mordor Intelligence estimates that  the cybersecurity market will grow 14.5% annually by 2025, Fortinet should still gain market share over the next several years.

A person's finger touching a digital image of a cloud with a padlock on it

Image source: Getty Images.

2. Emerging SD-WAN business

SD-WAN (Software-Defined Wide Area Networking) also contributed to the company's strong growth.

That technology allows enterprises' remote sites to access on-premises and cloud-based applications via a private network or via the Internet. Thus, companies can reduce their costs and use Internet access instead of paying for a pricey private network for their remote sites to access applications. However, connecting those remote sites to the Internet exposes them to greater cybersecurity threats, which represents an opportunity for Fortinet. The company offers all of the functionalities of a secure SD-WAN solution in a single box.

Management indicated during the earnings call that SD-WAN represented a high-single-digit percentage of total billings -- a leading indicator of revenue -- during the fourth quarter, compared to a negligible contribution in 2018. Besides, half of SD-WAN billings came from new customers, which provides the company with cross-selling opportunities with its other security products.

Besides, SD-WAN could become an important driver of revenue growth for Fortinet over the next few years. Market research company IDC estimates the SD-WAN infrastructure market will grow annually by 30.8% by 2023.

3. Solid GAAP operating margin

Fortinet's GAAP profitability remains a rare characteristic among high-growth cybersecurity stocks such as Palo Alto Networks. Thanks to its high gross margin -- usually associated with some pricing power -- and its controlled research & development and sales & marketing expenses as a percentage of revenue, Fortinet's fourth-quarter and full-year GAAP operating margins reached 19% and 16%, respectively.

FTNT Sales and Marketing Expense (% of Quarterly Revenues) Chart

FTNT Sales and Marketing Expense (% of Quarterly Revenues) data by YCharts.

Management confirmed that non-GAAP operating margin would average at least 25% over the next three years, which should remain slightly above the non-GAAP operating margin of 25% in 2019. If you apply this comparison to GAAP results, which takes into account important costs such as share-based compensation, GAAP operating margin should average at least 16% over the medium term.

Yet, despite these strong results, Fortinet's stock price barely moved during post-market trading. The company's enterprise value-to-sales ratio of 9.1 and enterprise value-to-EBITDA ratio of 50.0 indicate the market is already pricing in a strong long-term performance. 

Thus, the margin of safety and the upside potential seem limited; prudent investors should probably not be involved at this price.