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Billion Dollar Unicorns: Can Fortinet Get to $10 Billion in Revenue?

Posted on Monday, Apr 16th 2018

I interviewed the CEO of Fortinet Ken Xie way back in 2010, a year after it went public. Ken had also co-founded NetScreen, which was acquired by Juniper for $4 billion stock in 2004 when it had revenue of $200 million. Both companies bootstrapped first and raised money later. Today, Fortinet (NASDAQ: FTNT) is a global leader in broad, automated, and integrated cyber security 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 cyber security 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, Amazon Web Services, Google Cloud, IBM Cloud and Oracle Cloud; and IoT.

Fortinet 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% compared 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 the 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 in 2017.

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.

It ended the year with 5,066 employees and contractors. It has over 340,000 customers. It has over 50 offices across US, Canada, Argentina, Mexico, Singapore, Japan, India, China, Indonesia, Malaysia, Korea, Philippines, Australia, France, the United Kingdom, Austria, Denmark, Suadi Arabia, UAE, and Germany. Its 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 to $393 million, non-GAAP gross margin in the range of 75% to 76%, and non-GAAP EPS in the range of $0.21 to $0.22. Analysts expect earnings of $0.22 per share on revenue of $390 million.

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

Questions for the Board

The cyber security industry is highly competitive. Fortinet’s competitors include Check Point, Cisco, F5 Networks, FireEye, Forcepoint, Imperva, Juniper, McAfee, Palo Alto Networks, Proofpoint,  SonicWALL, Sophos, Symantec, Qualys, and Trend Micro.

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, it 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 have already 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’s 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 had gone public in 2009, raising $156 million at a valuation of $804 million.

I am a big fan of businesses that have a strong focus on fundamentals. Fortinet is one such Unicorn that has never bothered with fluff, always executed 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?

This segment is a part in the series : Billion Dollar Unicorns


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