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Fortinet (FTNT) Up 9.9% Since Last Earnings Report: Can It Continue?
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It has been about a month since the last earnings report for Fortinet (FTNT - Free Report) . Shares have added about 9.9% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Fortinet due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Fortinet Inc. reported strong second-quarter 2024 results, wherein both earnings and revenues surpassed the Zacks Consensus Estimate and improved year over year.
Fortinet reported second-quarter 2024 non-GAAP earnings per share (EPS) of 57 cents, which beat the Zacks Consensus Estimate by 39.02%. The bottom line climbed 50% from the year-ago quarter’s earnings of 38 cents per share.
Total revenues of $1.43 billion beat the consensus mark by 2.31% and improved 10.9% year over year, driven by strong growth in services revenues.
Quarter in Detail
Segment-wise, Product revenues declined 4.4% year over year to $451.9 million, primarily due to a tough comparison. Product revenues grew 17.9% in the prior-year period, benefiting from the drawdown of backlog. Software license revenues increased 26% and represented a high teens percentage of product revenues.
Combined revenues from software license and software service, such as cloud and SaaS security solutions, increased 32% and represented an annual revenue run rate approaching $800 million.
Services revenues climbed 19.8% to $982.4 million, primarily driven by more than 36% growth from Unified SASE and SecOps. Services revenues accounted for 68.5% of total revenues.
Billings were flat year over year at $1.54 billion. The performance was due to the difficult year-earlier comparison created by the backlog contributions to billings that occurred in the year-ago quarter.
For the second quarter, Unified SASE accounted for 23% of total billings. Fortinet’s Security Operations solutions, which are better integrated and automated together than competitors, accounted for 10% of total billings. Initially launched as part of FortiSIEM and FortiSOAR, the GenAI technology, FortiAI, is being deployed across both networking and security products. Secure Networking accounted for 67% of total billings.
Larger enterprises are proving to be the company’s largest customer segment, with large and mid-enterprises representing 86% and 82% of SecOps and Unified SASE billings.
As of Jun 30, 2024, deferred revenues were $5.9 billion, up 15% year over year.
Geographically, the Middle East and Africa region registered the highest top-line growth with a 10.9% increase. The America region and the Asia Pacific region rose 10.9% and 10%, respectively.
Margins
The non-GAAP gross margin expanded 360 basis points (bps) year over year to 81.5% in the second quarter of 2024. Service gross margins of 88.6% were up 240 bps as service revenue growth outpaced labor cost increases and benefited from the mix shift toward higher-margin FortiGuard security subscriptions. Product gross margins were 66% as the company witnessed margin pressure related to inventory levels and the transition to a more normalized demand environment.
Non-GAAP operating income was $503.6 million for the second quarter of 2024, representing a non-GAAP operating margin of 35.1%.
Balance Sheet & Cash Flow
Fortinet exited the second quarter with cash and cash equivalents and short-term investments of $3.3 billion, up from the $3 billion reported at the end of the first quarter of 2024.
During the reported quarter, FTNT generated operating and free cash flows of $342 million and $318.9 million, respectively.
Guidance
Fortinet estimates third-quarter revenues in the range of $1.445-$1.505 billion. Billings are estimated in the band of $1.53-$1.6 billion.
The non-GAAP gross margin is expected in the range of 79-80%, while the non-GAAP operating margin is anticipated between 30.5% and 31.5%. Non-GAAP EPS is projected in the band of 56-58 cents. The company expects a non-GAAP effective tax rate of 17% for the third quarter and diluted shares outstanding between 767 million and 777 million.
For 2024, FTNT predicts revenues in the range of $5.8-$5.9 billion. Services revenues are projected in the range of $3.975-$4.025 billion. Billings are expected in the band of $6.4-$6.6 billion.
The non-GAAP gross margin and operating margin are expected between 79-80% and 30-31.5%, respectively. Non-GAAP EPS is anticipated between $2.13 and $2.19. It forecasts a non-GAAP effective tax rate of 17% and a diluted share count between 767 million and 777 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
The consensus estimate has shifted 22.12% due to these changes.
VGM Scores
Currently, Fortinet has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Fortinet has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
Performance of an Industry Player
Fortinet is part of the Zacks Internet - Software industry. Over the past month, Twilio (TWLO - Free Report) , a stock from the same industry, has gained 3.1%. The company reported its results for the quarter ended June 2024 more than a month ago.
Twilio reported revenues of $1.08 billion in the last reported quarter, representing a year-over-year change of +4.3%. EPS of $0.87 for the same period compares with $0.54 a year ago.
For the current quarter, Twilio is expected to post earnings of $0.87 per share, indicating a change of +50% from the year-ago quarter. The Zacks Consensus Estimate has changed +32% over the last 30 days.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for Twilio. Also, the stock has a VGM Score of A.
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Fortinet (FTNT) Up 9.9% Since Last Earnings Report: Can It Continue?
It has been about a month since the last earnings report for Fortinet (FTNT - Free Report) . Shares have added about 9.9% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Fortinet due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Fortinet Q2 Earnings Beat Expectations, Sales Rise Y/Y
Fortinet Inc. reported strong second-quarter 2024 results, wherein both earnings and revenues surpassed the Zacks Consensus Estimate and improved year over year.
Fortinet reported second-quarter 2024 non-GAAP earnings per share (EPS) of 57 cents, which beat the Zacks Consensus Estimate by 39.02%. The bottom line climbed 50% from the year-ago quarter’s earnings of 38 cents per share.
Total revenues of $1.43 billion beat the consensus mark by 2.31% and improved 10.9% year over year, driven by strong growth in services revenues.
Quarter in Detail
Segment-wise, Product revenues declined 4.4% year over year to $451.9 million, primarily due to a tough comparison. Product revenues grew 17.9% in the prior-year period, benefiting from the drawdown of backlog. Software license revenues increased 26% and represented a high teens percentage of product revenues.
Combined revenues from software license and software service, such as cloud and SaaS security solutions, increased 32% and represented an annual revenue run rate approaching $800 million.
Services revenues climbed 19.8% to $982.4 million, primarily driven by more than 36% growth from Unified SASE and SecOps. Services revenues accounted for 68.5% of total revenues.
Billings were flat year over year at $1.54 billion. The performance was due to the difficult year-earlier comparison created by the backlog contributions to billings that occurred in the year-ago quarter.
For the second quarter, Unified SASE accounted for 23% of total billings. Fortinet’s Security Operations solutions, which are better integrated and automated together than competitors, accounted for 10% of total billings. Initially launched as part of FortiSIEM and FortiSOAR, the GenAI technology, FortiAI, is being deployed across both networking and security products. Secure Networking accounted for 67% of total billings.
Larger enterprises are proving to be the company’s largest customer segment, with large and mid-enterprises representing 86% and 82% of SecOps and Unified SASE billings.
As of Jun 30, 2024, deferred revenues were $5.9 billion, up 15% year over year.
Geographically, the Middle East and Africa region registered the highest top-line growth with a 10.9% increase. The America region and the Asia Pacific region rose 10.9% and 10%, respectively.
Margins
The non-GAAP gross margin expanded 360 basis points (bps) year over year to 81.5% in the second quarter of 2024. Service gross margins of 88.6% were up 240 bps as service revenue growth outpaced labor cost increases and benefited from the mix shift toward higher-margin FortiGuard security subscriptions. Product gross margins were 66% as the company witnessed margin pressure related to inventory levels and the transition to a more normalized demand environment.
Non-GAAP operating income was $503.6 million for the second quarter of 2024, representing a non-GAAP operating margin of 35.1%.
Balance Sheet & Cash Flow
Fortinet exited the second quarter with cash and cash equivalents and short-term investments of $3.3 billion, up from the $3 billion reported at the end of the first quarter of 2024.
During the reported quarter, FTNT generated operating and free cash flows of $342 million and $318.9 million, respectively.
Guidance
Fortinet estimates third-quarter revenues in the range of $1.445-$1.505 billion. Billings are estimated in the band of $1.53-$1.6 billion.
The non-GAAP gross margin is expected in the range of 79-80%, while the non-GAAP operating margin is anticipated between 30.5% and 31.5%. Non-GAAP EPS is projected in the band of 56-58 cents. The company expects a non-GAAP effective tax rate of 17% for the third quarter and diluted shares outstanding between 767 million and 777 million.
For 2024, FTNT predicts revenues in the range of $5.8-$5.9 billion. Services revenues are projected in the range of $3.975-$4.025 billion. Billings are expected in the band of $6.4-$6.6 billion.
The non-GAAP gross margin and operating margin are expected between 79-80% and 30-31.5%, respectively. Non-GAAP EPS is anticipated between $2.13 and $2.19. It forecasts a non-GAAP effective tax rate of 17% and a diluted share count between 767 million and 777 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
The consensus estimate has shifted 22.12% due to these changes.
VGM Scores
Currently, Fortinet has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Fortinet has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
Performance of an Industry Player
Fortinet is part of the Zacks Internet - Software industry. Over the past month, Twilio (TWLO - Free Report) , a stock from the same industry, has gained 3.1%. The company reported its results for the quarter ended June 2024 more than a month ago.
Twilio reported revenues of $1.08 billion in the last reported quarter, representing a year-over-year change of +4.3%. EPS of $0.87 for the same period compares with $0.54 a year ago.
For the current quarter, Twilio is expected to post earnings of $0.87 per share, indicating a change of +50% from the year-ago quarter. The Zacks Consensus Estimate has changed +32% over the last 30 days.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for Twilio. Also, the stock has a VGM Score of A.