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Fortinet breaks the mold, surprises investors with a strong quarter

AInvestTuesday, Aug 6, 2024 7:22 pm ET
2min read

Fortinet (FTNT) reported its Q2 earnings, delivering robust results that exceeded analyst expectations. The beat was notable as FTNT has been a habitual underperformer over the past three quarters. The performance garnered plenty of attention from investors as the stock ripped above the $55 area and rallied 15% to a four month high. This is all the more notable as it comes during heightened market uncertainty.

The company posted an adjusted EPS of $0.57, surpassing the consensus estimate of $0.41. Revenues for the quarter came in at $1.43 billion, slightly above the expected $1.403 billion, reflecting an 11% year-over-year growth. The strong performance was driven by a 20% increase in service revenue, which reached $982.4 million, beating the estimated $973.2 million. Product revenue, however, declined by 4.4% year-over-year to $451.9 million, still above the estimated $430.8 million.

Key metrics also showed positive trends. Fortinet's adjusted operating margin was 35.1%, significantly higher than the 26.9% reported a year ago and above the 26.6% consensus. Total billings were $1.54 billion, in line with the prior year and slightly above the estimated $1.52 billion. Deferred revenue increased by 15% year-over-year to $5.90 billion, which did miss the estimated $5.92 billion. Cash flow from operations stood at $342 million, although this was a decline from $515.1 million in the same quarter last year.

Fortinet provided optimistic guidance for Q3 and the full fiscal year 2024. For Q3, the company expects revenue between $1.445 billion and $1.505 billion, adjusted EPS between $0.56 and $0.58, and billings between $1.53 billion and $1.60 billion. For the full year, Fortinet guided revenue between $5.8 billion and $5.9 billion, service revenue between $3.975 billion and $4.025 billion, and adjusted EPS between $2.13 and $2.19, all exceeding analyst expectations.

The company's positive guidance and strong results initially drove the shares up by 10.9%, reflecting investor confidence in its growth trajectory and operational efficiency.

Fortinet's Q2 performance was underpinned by significant improvements in profitability. The company's GAAP operating margin reached a record 30.5%, up from 21.6% a year ago, while the non-GAAP operating margin was 35.1%, up from 26.9% in the previous year. GAAP net income was $379.8 million, with a diluted net income per share of $0.49, compared to $266.3 million and $0.33 per share, respectively, a year ago. Non-GAAP net income was $439.9 million, or $0.57 per share, up from $300.4 million, or $0.38 per share, in the same quarter last year.

The company's robust cash flow and strong financial health were highlighted by a free cash flow of $318.9 million for Q2 2024, compared to $438.3 million in the same quarter of the previous year. This, along with a total cash and cash equivalents of $1.67 billion as of June 30, 2024, positions Fortinet well to continue its strategic investments and growth initiatives.

In conclusion, Fortinet's Q2 results demonstrated solid revenue and EPS growth, exceeding market expectations and reflecting strong operational performance. The positive guidance for Q3 and the full year 2024, combined with significant improvements in profitability and cash flow, suggest that Fortinet is well-positioned for continued success despite the competitive landscape. The absence of a stock split did not dampen investor enthusiasm, as evidenced by the positive price action following the earnings announcement.

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