Wednesday, January 26, 2011

Fortinet Delivers Strong Results

Fortinet delivered a super set of results and demonstrated that the IT security segment has the potential to be one of the fastest growing sectors in 2011.

I first featured Fortinet in a -more in depth- post linked here

I was very pleased with these results and will update this post again after I here the conference call later, so add this blog to your twitter feed by clicking the button on the left of this site if you want to keep updated. I bought some more stock .


Fortinet Earnings

The stock is up sharply as they simply blew away expectations

  • Revs of  $93.6 vs. $86.7m estimates
  • Non-GAAP EPS of 19c vs. 14c estimates
The reported non-GAAP was actually 22c but this included 3c of tax benefits, so I have excluded that to aid comparisons. These are superb numbers.

 In the previous analysis I argued that Fortinet was experiencing a number of favourable end demand drivers and also had great potential to deliver very strong earnings and cash flow growth due to opportunities of scale. It looks like they are beginning to deliver. I've updated numbers from the previous chart.






All the margins are moving in the right directions. The tax rate is likely to go up but I think it is likely that Fortinet can comfortably hit a 30% free cash flow margin next year. Moreover, in the latest results total year billings went up 33% year on year and sequentially by 17.2%

Evaluation

Incidentally, analysts currently have 16.9% revenue growth forecast for 2011 but this will be subject to revision. Given a free cash flow margin of 30% this would put the stock on a forward FCF/EV of 113/2210=5.1%  This is too cheap for a stock growing EBITDA in the mid teens. I think the stock has a lot further to run. I would consider a $42 target to be conservative.

Fortinet
2008
2009
2010
CheckPoint
2009
Revenue
211,791
252,115
324,696


791,147
Gross Mgn
71.10
72.24
73.58


85.58
SG&AMgn
49.27
45.55
41.37


30.00
R & D Mgn
17.49
16.74
15.33


9.71
Op Mgn
2.33
10.05
17.04


44.89
FCF Mgn
16.47
22.76
30.49


59.82


  

source: Fortinet, Earnings View