Wednesday, June 18, 2014

Fortinet Cash Flow Analysis

IT security company Fortinet has delivered strong results recently, and despite recent falls, the stock is still up nearly 12% this year. However, headline numbers do not always tell the full story and Fools should look closely at changes in its cash flow generation in order to better judge the company. Is it maturing into the kind of cash cow that rival Check Point Software  is, or is it moving in the other direction?

Fortinet's disappearing free-cash flow
As a company matures it typically sees its revenue growth slow, and a company like Check Point Software is a good example of this. Check Point Software's revenue growth has slowed to single-digits, but over the last five years it has converted an average of around 59% of its revenue into free-cash flow.

Fortinet's mid-teens revenue growth tells investors that the business is less mature than Check Point, but the real question is how is Fortinet's free-cash flow conversion developing?

Unfortunately, investors received some bad underlying news on this issue in 2013. Simply put, a combination of weaker than expected revenue growth, and more importantly, the need to carry more inventory managed to eat into its cash flow conversion. Indeed, a table of its revenue and free-cash flow guidance over the year reveals what happened.