Fortinet (FTNT 10.90%) has been on a tear of late. Its business has received a shot in the arm thanks to an increase in demand for cybersecurity solutions, making it one of the top growth stocks in recent months.
However, investors weren't very pleased with Fortinet's latest quarterly report, released Aug. 6. Shares of the cybersecurity specialist fell after its fiscal-second-quarter billings turned out to be a hair below expectations. Fortinet's billings increased 14.3% annually during the quarter to $711.5 million, below Wall Street's $712.1 million estimate.
Investors were probably spooked by this minor miss because billings are indicative of future revenue. Barring that, it is difficult to find much fault with the company's latest quarterly report or guidance, indicating that the recent drop in the stock price could be a buying opportunity.
Fortinet delivers impressive numbers once again
Fortinet's revenue was up 18% annually to $615.5 million during the quarter, while adjusted net income increased by nearly a third to $135.1 million, or $0.82 per share. The numbers were well ahead of analysts' expectations.
The company's third-quarter guidance also turned out to be solid. Fortinet anticipates $630 million to $645 million in revenue this quarter and earnings of $0.77 per share at the midpoint of its guidance range. The company clocked $547.5 million in revenue and earnings of $0.67 per share during the same period last year, which would translate into year-over-year gains in the mid-teens.
A closer look at a few other metrics tells us that Fortinet should be able to sustain its impressive growth rate over the long run. For instance, the company's deferred revenue increased 24% annually to $2.3 billion during the most recent quarter -- faster than the growth of its actual revenue. This is impressive, as deferred revenue refers to the money collected by a company in advance for services that will be delivered later. The line item is recognized on the income statement once the actual delivery of services is done.
The nice bump in Fortinet's deferred revenue was driven by a strong jump in deal activity during the quarter. Deals over $1 million increased 28% year over year to 59 last quarter. The number of $50,000-plus deals increased close to 11% from the prior-year period, while deals worth $250,000 and above grew in the mid-single digits. The number of deals priced at $500,000 remained consistent year over year at 146.
More importantly, Fortinet's product mix improved during the quarter. The number of customers opting for high-end FortiGate next-generation firewall products and services increased 1.9 percentage points year over year to 35.2% during the quarter. This positively impacted Fortinet's margins during the quarter, as FortiGate accounts for 73% of the company's total billings.
Fortinet's margins have improved nicely over the past three years as the company has shifted its focus toward higher-margin products and services.
Last quarter, Fortinet's gross margin increased 260 basis points thanks to lower costs and an increase of 40% in sales of software products. More importantly, the company witnessed margin growth across both its product and services businesses.
Product gross margin was up 340 basis points annually to 61%, while services gross margin improved by 120 basis points to 88.5%. Fortinet got nearly two-thirds of its revenue from the services business compared to 63.6% in the year-ago quarter, so it can clock stronger earnings growth by getting more revenue from the higher-margin business.
All in all, Fortinet's top and bottom lines look set to improve at a nice clip in the future considering the amount of deferred revenue it is sitting on and the pace of its margin growth. Throw in a solid balance sheet with almost negligible debt and over $1.5 billion in cash, and investors have another reason to buy this growth-oriented cybersecurity stock that may not be running out of steam anytime soon.