Billion-Dollar Unicorns: Can Fortinet Get To $10 Billion In Revenue?

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About: Fortinet, Inc. (FTNT)
by: Sramana Mitra
Summary

Fortinet stock is trading at a 52-week high of $55.82 with a market cap of $9.4 billion.

I'm a big fan of businesses that have a strong focus on fundamentals.

Fortinet is one such company that has never bothered with fluff, always executing precisely.

Can the company go to $10 billion in revenue in its next phase and take in its stride market shifts with respect to the cloud architecture?

I interviewed the CEO of Fortinet (NASDAQ:FTNT), Ken Xie, way back in 2010, a year after it went public. Ken also co-founded NetScreen, which was acquired by Juniper (NYSE:JNPR) for $4 billion stock in 2004 when it had revenue of $200 million. Both companies bootstrapped first and raised money later. Today, Fortinet is a global leader in broad, automated, and integrated cybersecurity solutions with a market cap of close to $10 billion.

Fortinet's Financials

Sunnyvale, California-based Fortinet was founded in 2000 by brothers Ken and Michael Xie. Fortinet provides cybersecurity solutions to enterprises, service providers, and government organizations across the world. Its flagship network security solutions include FortiGate physical, virtual machine, and cloud platforms, which provide integrated security and networking functions to protect data, applications, and users from network- and content-level security threats.

Fortinet has four focus areas: FortiGate network security appliances; Fortinet Security Fabric for unified security across the entire digital attack surface; cloud security with FortiCASB, which is available across all major cloud providers, including Microsoft Azure (NASDAQ:MSFT), Amazon Web Services (NASDAQ:AMZN), Google Cloud (GOOG, GOOGL), IBM Cloud (NYSE:IBM) and Oracle Cloud (NYSE:ORCL); and IoT.

The company recently reported fourth-quarter results that beat earnings and revenue estimates. Q4 revenue was $416.7 million, up 15%. GAAP net loss was $29 million, impacted by a one-time tax expense of $63 million. Non-GAAP net income was $55.5 million, or $0.32 per share. Analysts estimated earnings of $0.29 per share on revenue of $409.1 million.

Product revenue was $162.1 million, up 2%, and Service revenue grew 25% to $254.6 million. Service revenue is generated primarily from FortiCare technical support services and FortiGuard security subscription services. A small portion of services revenue is also generated from professional services and training services.

For full-year 2017, revenue increased 17% to $1.49 billion. GAAP net income was $31.4 million for 2017, compared to GAAP net income of $32.2 million for 2016. Non-GAAP net income was $184.7 million for 2017, compared to non-GAAP net income of $129.5 million for 2016. Product revenue was up 5% to $577.2 million in 2017. Service revenue was up 27% to $917.8 million during the same period.

As of December 31, 2017, cash, cash equivalents and investments were $1.35 billion. In 2017, Fortinet repurchased 11.2 million shares of common stock, for an aggregate purchase price of $446.3 million.

The company ended the year with 5,066 employees and contractors. It has more than 340,000 customers. It has over 50 offices across the US, Canada, Argentina, Mexico, Singapore, Japan, India, China, Indonesia, Malaysia, Korea, Philippines, Australia, France, the United Kingdom, Austria, Denmark, Saudi Arabia, the UAE, and Germany. The company's research and development teams are located primarily in Sunnyvale and Burnaby in Canada.

For the first quarter, Fortinet expects revenue in the range of $387-393 million, non-GAAP gross margin in the range of 75-76%, and non-GAAP EPS in the range of $0.21-0.22. Analysts expect earnings of $0.22 per share on revenue of $390 million.

For fiscal year 2018, the company expects revenue in the range of $1.695-1.715 billion and non-GAAP EPS of $1.30-1.32.

Questions for the Board

The cybersecurity industry is highly competitive. Fortinet's competitors include Check Point Software (NASDAQ:CHKP), Cisco (NASDAQ:CSCO), F5 Networks (NASDAQ:FFIV), FireEye (NASDAQ:FEYE), Forcepoint (NYSE:RTN), Imperva (NASDAQ:IMPV), Juniper (JNPR), McAfee (NASDAQ:INTC), Palo Alto Networks (NYSE:PANW), Proofpoint (NASDAQ:PFPT), SonicWALL, Sophos (OTCPK:SPHHF), Symantec (NASDAQ:SYMC), Qualys (NASDAQ:QLYS), and Trend Micro (OTCPK:TMICF).

Fortinet has had an impressive run with a strong focus on fundamentals.

In the section on risks in its annual report, Fortinet mentions that most of its platform is currently deployed on premise, and if customers demand that its platform be provided through a SaaS or IaaS business model, the company would have to make additional investments in its infrastructure and personnel to maintain the competitiveness of its platform. To address this demand, Fortinet plans to introduce a program later this year to create a more organized, repeatable way for partners to deliver virtual FortiGate instances via a utility-based model. Some Fortinet partners already have been delivering their own FortiGate as a Service offerings for over five years. Subscription-based models allow for rapid scaling without major capex investment.

Over the years, Fortinet has made a couple of acquisitions, including Wi-Fi hardware company Meru in 2015 for $44 million and IT security, monitoring and analytics software vendor AccelOps for $22 million.

What other companies does Fortinet have on its radar? Will it consider leveraging the unprecedented opportunity in SaaS that I recently talked about, especially to mitigate the risks discussed above?

Fortinet stock is trading at a 52-week high of $55.82 with a market cap of $9.4 billion. Its 52-week low was $35.44 in September last year. It went public in 2009, raising $156 million at a valuation of $804 million.

I'm a big fan of businesses that have a strong focus on fundamentals. Fortinet is one such unicorn that has never bothered with fluff, always executing precisely.

Now, can the company go to $10 billion in revenue in its next phase and take in its stride market shifts with respect to the cloud architecture?