Fortinet's (FTNT.US) third-quarter results have cast a shadow over its financial performance, with the company experiencing its first year-over-year decline in firewall sales since its 2009 IPO, leading to a significant drop in its stock price. Despite an overall increase in total revenue, product revenue saw a slight decrease, causing concern among investors and analysts. The company's shift in focus towards high-growth areas like SASE (secure access service edge) and security operations tools, which currently represent 30% of its business, has not alleviated the market's reaction. Fortinet's stock plummeted by about 16%, reflecting the market's reaction to both the quarterly performance and the revised, lower-than-expected revenue outlook for the upcoming quarter.
The broader market impact of Fortinet's report was felt across the cybersecurity sector, with competitors like Palo Alto Networks also experiencing a downturn in their shares, albeit less severe. Fortinet's disappointing forecast and the cut in its annual revenue target have intensified concerns about slowing client spending amidst economic uncertainties. Fortinet's longer sales cycles and increased deal scrutiny have been cited as factors constraining its near-term results.
Financial Results
Financially, Fortinet's third quarter was actually pretty good from the purely nominal point of view, with total revenue increasing by 16% year over year to $1.33 billion. Service revenue saw a significant jump of 28% from the previous year, reaching $868.7 million.
- Total Revenue: Reported $1.33 billion, marking a 16% increase year over year
- Service Revenue: Increased by 28% year over year to $868.7 million
- Billings: Grew by 6% year over year to $1.49 billion
- Operating Income: Also saw a 14% increase year over year to $371.4 million
- Diluted Net Income Per Share: Grew by 24% year over year to $0.41
- Cash Flow from Operations: Showed a strong increase to $551.2 million, up from $483.0 million in the same quarter of the previous year.
- Free Cash Flow: Also increased to $481.1 million from $395.2 million year over year
For the fourth quarter of 2023, Fortinet's guidance suggests:
- Revenue: Expected to be between $1.380 billion and $1.440 billion.
- Billings: Forecasted to be between $1.560 billion and $1.700 billion.
- Operating Margin: Anticipated to be between 27.5% and 28.5%.
- Diluted Net Income Per Share: Estimated to be between $0.42 and $0.44.
For the fiscal year 2023, Fortinet forecasts:
- Revenue: Between $5.270 billion and $5.330 billion.
- Service Revenue: Expected to be between $3.355 billion and $3.375 billion.
- Billings: Projected to be between $6.095 billion and $6.235 billion.
- Operating Margin: Anticipated to be between 26.5% and 27.5%.
- Diluted Net Income Per Share: Estimated to be between $1.54 and $1.56.
source: xStation 5
Market Outlook
The market outlook for Fortinet is optimistic, with the Secure Networking market expected to grow annually by nearly 9% to $86 billion by 2027. Fortinet is well-positioned in this market, leading in firewall revenues and shipments. The Universal SASE market, where Fortinet offers a unique cloud or appliance-based solution, is forecasted to grow nearly 20% annually to $36 billion by 2027. Additionally, the Security Operations market is anticipated to expand just over 14% annually to $78 billion by 2027, with Fortinet's comprehensive SecOps platform leading the industry. These growth opportunities, combined with Fortinet's focus on innovation and strategic investments, present a promising future for the company in this segments.
