Fortinet Reports Third Quarter 2018 Financial Results

Security Fabric Platform Drives Strong Year-Over-Year Growth in Third Quarter 2018 Billings, Revenue and Operating Margin

SUNNYVALE, Calif. - Nov 1, 2018
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Third Quarter 2018 Financial Highlights

  • Revenue of $453.9 million, up 21% year over year
  • Product revenue of $164.5 million, up 20% year over year
  • Billings of $527.5 million, up 22% year over year1
  • Deferred revenue of $1.54 billion, up 27% year over year
  • GAAP operating margin of 14%
  • Non-GAAP operating margin of 24%1
  • Cash flow from operations of $176.7 million
  • Free cash flow of $158.5 million1

Fortinet® (Nasdaq: FTNT), a global leader in broad, integrated and automated cybersecurity solutions, today announced financial results for the third quarter ended September 30, 2018.

“We delivered strong third quarter financial results. Our market share gains are being driven by the competitive advantages associated with our highly differentiated Security Fabric platform,” said Ken Xie, Founder, Chairman and Chief Executive Officer. “Organically built from the ground up, our Security Fabric platform provides a broad set of security capabilities with exceptional integration and automation, for both on-premise and cloud deployment. Fortinet is well positioned to empower our customers with the latest evolution in network security and we are excited about the sizable opportunities that lie ahead."

Recent Highlights

  • Gartner Magic Quadrants: Fortinet has recently been recognized in three Gartner Magic Quadrants; as a Leader in the Magic Quadrant for Enterprise Network Firewalls for the second time, as a Leader in the Magic Quadrant for Unified Threat Management (SMB Multifunction Firewalls) for the ninth time, and is positioned furthest for completeness of vision in the Challengers quadrant of the first Magic Quadrant for WAN Edge Infrastructure.* Fortinet has appeared in seven Gartner Magic Quadrants* over the last twelve months.
  • Gartner Peer Insights Customers Choice: Fortinet has also been recognized as a 2018 Gartner Peer Insights Customers’ Choice for Enterprise Network Firewalls and a 2018 Gartner Peer Insights Customers’ Choice for Unified Threat Management.**
  • NSS Labs SD-WAN Recommendation: Fortinet was the only vendor with security capabilities to receive an SD-WAN "Recommended" rating in the first NSS Labs Software-Defined Wide Area Networking test report.
  • NSS Labs Additional Recommendations: The FortiGate Next-Generation Firewall received a fifth consecutive “Recommended” rating in the NSS Labs NGFW report, delivering high SSL performance suited for encrypted cloud access. Fortinet is the only vendor to have received NSS Labs Recommended ratings in both the SD-WAN and Next-Generation Firewall group tests. Fortinet’s commitment to third party testing and validation has resulted in Fortinet solutions earning NSS Labs Recommended ratings across nine different group tests.
  • ZoneFox Acquisition: In October, Fortinet acquired ZoneFox, further enhancing Fortinet's Security Fabric platform and strengthening its existing endpoint and SIEM security business. By adding ZoneFox’s cloud-based threat-hunting technology, Fortinet is well positioned to provide its customers with an integrated approach to defend against insider threats, eliminate blind spots and protect today’s expanding attack surface with automation and machine learning.

Financial Highlights

  • Revenue: Total revenue was $453.9 million for the third quarter of 2018, an increase of 21% compared to $374.2 million in the same quarter of 2017.
  • Product Revenue: Product revenue was $164.5 million for the third quarter of 2018, an increase of 20% compared to $137.1 million in the same quarter of 2017.
  • Service Revenue: Service revenue was $289.4 million for the third quarter of 2018, an increase of 22% compared to $237.1 million in the same quarter of 2017.
  • Billings1: Total billings were $527.5 million for the third quarter of 2018, an increase of 22% compared to $431.7 million in the same quarter of 2017.
  • Deferred Revenue: Total deferred revenue was $1.54 billion as of September 30, 2018, an increase of 27% compared to $1.22 billion as of September 30, 2017.
  • GAAP Operating Income and Margin: GAAP operating income was $62.8 million for the third quarter of 2018, representing a GAAP operating margin of 14%. GAAP operating income was $33.7 million for the same quarter of 2017, representing a GAAP operating margin of 9%.
  • Non-GAAP Operating Income and Margin1: Non-GAAP operating income was $108.5 million for the third quarter of 2018, representing a non-GAAP operating margin of 24%. Non-GAAP operating income was $70.0 million for the third quarter of 2017, representing a non-GAAP operating margin of 19%.
  • GAAP Effective Tax Rate: GAAP effective tax rate was 17% in the third quarter of 2018, compared to an effective tax rate of 30% for the same quarter in 2017.
  • Non-GAAP Effective Tax Rate: Non-GAAP effective tax rate was 24% in the third quarter of 2018, compared to 32% for the same quarter in 2017.
  • GAAP Net Income and Diluted Net Income Per Share: GAAP net income was $58.7 million for the third quarter of 2018, compared to GAAP net income of $26.7 million for the same quarter of 2017. GAAP diluted net income per share was $0.33 for the third quarter of 2018, based on 175.7 million diluted weighted-average shares outstanding, compared to $0.15 for the same quarter of 2017, based on 179.0 million diluted weighted-average shares outstanding.
  • Non-GAAP Net Income and Diluted Net Income Per Share1: Non-GAAP net income was $86.7 million for the third quarter of 2018, compared to non-GAAP net income of $50.6 million for the same quarter of 2017. Non-GAAP diluted net income per share was $0.49 for the third quarter of 2018, based on 175.7 million diluted weighted-average shares outstanding, compared to $0.28 for the same quarter of 2017, based on 179.0 million diluted weighted-average shares outstanding.
  • Cash Flow From Operations and Free Cash Flow1: In the third quarter of 2018, cash flow from operations was $176.7 million, compared to $162.3 million in the same quarter of 2017. Free cash flow1 was $158.5 million during the third quarter of 2018, compared to $140.6 million in the same quarter of 2017.

Guidance

For the fourth quarter of 2018, Fortinet currently expects:

  • Revenue in the range of $490.0 million to $500.0 million
  • Billings in the range of $620.0 million to $635.0 million
  • Non-GAAP gross margin in the range of 75% to 76%
  • Non-GAAP operating margin in the range of 24.0% to 24.5%, including a benefit associated with the adoption of ASC 606 of approximately 250 basis points
  • Diluted non-GAAP earnings per share in the range of $0.50 to $0.52, assuming a non-GAAP effective tax rate of 24%. This assumes a diluted share count of 178 million to 179 million

For the fiscal year of 2018, Fortinet currently expects:

  • Revenue in the range of $1.785 billion to $1.795 billion
  • Billings in the range of $2.125 billion to $2.140 billion
  • Non-GAAP gross margin in the range of 75% to 76%
  • Non-GAAP operating margin in the range of 21.5% to 22.0%, including a benefit associated with the adoption of ASC 606 of approximately 300 basis points
  • Diluted non-GAAP earnings per share in the range of $1.72 to $1.76, assuming a non-GAAP effective tax rate of 24%. This assumes a diluted share count of 174 million to 176 million

The above guidance for the fourth quarter and full year of 2018 includes the transition impact of ASC 606 adoption, which was effective January 1, 2018. Our guidance with respect to non-GAAP financial measures excludes stock-based compensation and amortization of acquired intangible assets. We have not reconciled our guidance with respect to non-GAAP financial measures to the corresponding GAAP measures because certain items that impact these measures are uncertain or out of our control, or cannot be reasonably predicted. Accordingly, a reconciliation of these non-GAAP financial measures to the corresponding GAAP measures is not available without unreasonable effort.

1 A reconciliation of GAAP to non-GAAP measures has been provided in the financial statement tables included in this press release. An explanation of these measures is also included below under the heading “Non-GAAP Financial Measures.”

Conference Call Details

Fortinet will host a conference call today at 1:30 p.m. Pacific Time (4:30 p.m. Eastern Time) to discuss the earnings results. The call can be accessed by dialing (877) 303-6913 (domestic) or (224) 357-2188 (international) with conference ID # 4694837. A live webcast of the conference call and supplemental slides will be accessible from the Investor Relations page of Fortinet’s website at http://investor.fortinet.com and a replay will be archived and accessible at http://investor.fortinet.com/events.cfm. A replay of this conference call can also be accessed through November 8, 2018, by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID # 4694837.

Fourth Quarter 2018 Investor Conference Participation Schedule:

  • UBS Global Technology Conference
          November 12, 2018 - San Francisco, CA

  • Nasdaq 39th Investor Conference
          December 4, 2018 - London, UK

  • Barclays' Global Technology, Media, and Telecommunications Conference
          December 6, 2018 - San Francisco, CA

Members of Fortinet’s management team are expected to present at these conferences and discuss the latest company strategies and initiatives. Fortinet’s conference presentations are expected to be available via webcast on the company’s web site. To listen to these presentations and access the most updated information and listen to the webcast of each event, please visit the Investor Relations page of Fortinet’s website at http://investor.fortinet.com. The schedule is subject to change.

*Sources: Magic Quadrant for Enterprise Network Firewalls, Adam Hils | Jeremy D'Hoinne | Rajpreet Kaur, 4 October 2018, Magic Quadrant for Endpoint Protection Platforms, Ian McShane | Avivah Litan | Eric Ouellet | Prateek Bhajanka, 24 January 2018, Magic Quadrant for Security Information and Event Management, Kelly Kavanagh | Toby Bussa, 4 December 2017, Magic Quadrant for Unified Threat Management (SMB Multifunction Firewalls), Rajpreet Kaur | Claudio Neiva, 20 September 2018, Magic Quadrant for Web Application Firewalls, Jeremy D'Hoinne | Adam Hils | Ayal Tirosh | Claudio Neiva, 29 August 2018, and Magic Quadrant for Wired & Wireless LAN Access Infrastructure, Bill Menezes | Christian Canales | Tim Zimmerman | Mike Toussaint, 11 July 2018, Magic Quadrant for WAN Edge infrastructure, Joe Skorupa | Andrew Lerner | Christian Canales | Mike Toussaint, 18 October 2018.

Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advise technology users to select only those vendors with the highest ratings or other designation. Gartner research publications consist of the opinions of Gartner’s research organization and should not be construed as statements of fact. Gartner disclaims all warranties, expressed or implied, with respect to this research, including any warranties of merchantability or fitness for a particular purpose.

**Gartner Peer Insights Customers’ Choice constitute the subjective opinions of individual end-user reviews, ratings, and data applied against a documented methodology; they neither represent the views of, nor constitute an endorsement by, Gartner or its affiliates.
 

Read the full press release (includes financial tables)

About Fortinet

Fortinet (NASDAQ: FTNT) secures the largest enterprise, service provider, and government organizations around the world. Fortinet empowers its customers with intelligent, seamless protection across the expanding attack surface and the power to take on ever-increasing performance requirements of the borderless network - today and into the future. Only the Fortinet Security Fabric architecture can deliver security features without compromise to address the most critical security challenges, whether in networked, application, cloud or mobile environments. Fortinet ranks #1 in the most security appliances shipped worldwide and more than 360,000 customers trust Fortinet to protect their businesses. Learn more at https://www.fortinet.com, the Fortinet Blog, or FortiGuard Labs.

Copyright © 2018 Fortinet, Inc. All rights reserved. The symbols ® and ™ denote respectively federally registered trademarks and common law trademarks of Fortinet, Inc., its subsidiaries and affiliates. Fortinet's trademarks include, but are not limited to, the following: Fortinet, FortiGate, FortiGuard, FortiCare, FortiManager, FortiAnalyzer, FortiOS, FortiASIC, FortiMail, FortiClient, FortiSIEM, FortiSandbox, FortiWiFi, FortiAP, FortiSwitch, FortiWeb, FortiADC, FortiWAN, and FortiCloud. Other trademarks belong to their respective owners. Fortinet has not independently verified statements or certifications herein attributed to third parties and Fortinet does not independently endorse such statements. Notwithstanding anything to the contrary herein, nothing herein constitutes a warranty, guarantee, contract, binding specification or other binding commitment by Fortinet or any indication of intent related to a binding commitment, and performance and other specification information herein may be unique to certain environments. This news release may contain forward-looking statements that involve uncertainties and assumptions, such as statements regarding technology releases among others. Changes of circumstances, product release delays, or other risks as stated in our filings with the Securities and Exchange Commission, located at www.sec.gov, may cause results to differ materially from those expressed or implied in this press release. If the uncertainties materialize or the assumptions prove incorrect, results may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. Fortinet assumes no obligation to update any forward-looking statements, and expressly disclaims any obligation to update these forward-looking statements.