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Fortinet Inc (FTNT) Q1 2024 Earnings Call Transcript Highlights: Record Margins and Cash Flow ...

GuruFocus Research
·4-min read

  • Operating Margin: Increased by 200 basis points to a first quarter record of 28.5%.

  • Cash Flow from Operations: Record $830 million.

  • Adjusted Free Cash Flow Margin: 61%.

  • Billings: $1.41 billion, with Unified SASE accounting for 24% of total billings.

  • Revenue: $1.35 billion, within guidance range.

  • Free Cash Flow: $609 million, representing a 45% free cash flow margin.

  • Service Revenue: Grew 24% to $944 million, accounting for 70% of total revenue.

  • Product Revenue: Decreased 18% to $409 million.

  • Gross Margin: Increased by 180 basis points to 78.1%.

  • Service Gross Margins: Increased by 200 basis points to 87.9%.

  • Product Gross Margin: 55.7%.

Release Date: May 02, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

  • Fortinet Inc (NASDAQ:FTNT) achieved a first quarter record operating margin of 28.5%, an increase of 200 basis points.

  • Generated record cash flow from operations amounting to $830 million, with an adjusted free cash flow margin of 61%.

  • Unified SASE and secure operation market accounted for one-third of first quarter billings, showing strong growth and market adoption.

  • Fortinet Inc (NASDAQ:FTNT) was recognized in five Gartner Magic Quadrants, highlighting its comprehensive and integrated security solutions.

  • Introduced the industry-first IoT security Generative AI assistant, enhancing product offerings and staying ahead in technology innovation.

Negative Points

  • Total billings declined by 6% year-over-year, influenced by a tough comparison from the previous year's backlog contributions.

  • Product revenue decreased by 18% due to challenging comparisons and backlog fulfillment from the previous year.

  • Experienced slight weakness in the European market, impacting overall performance slightly off the midpoint of guidance.

  • The high interest rate environment is causing enterprises to favor OpEx over CapEx, affecting some product pricing and sales strategies.

  • Despite strong performance in certain segments, retail and financial services sectors were more challenged in terms of growth.

Q & A Highlights

Q: What drove the billings in Q1 to be closer to the lower end of your guidance? A: Keith F. Jensen, CFO of Fortinet, noted that slight weakness in Europe nudged the billings towards the lower end of the guidance range, but it wasn't a significant deviation. The overall annual guidance remains consistent with their expectations, supported by a healthy pipeline and operational improvements made over the last 6-9 months.

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Q: Can you update on your pricing strategy, especially regarding discounting when cross-selling bundles like SecOps or SSE services? A: Ken Xie, CEO of Fortinet, explained that their pricing strategy has been consistent over the past 20 years, aiming to maintain healthy gross margins and margins for partners. They adjust prices based on cost changes but have returned some margins to partners and lowered product prices to pre-pandemic levels as costs decreased.

Q: How much of the SASE traction seen in the quarter was from SD-WAN conversion? A: Ken Xie mentioned that existing SD-WAN customers contributed 81% of Unified SASE billings, indicating significant conversion within this customer base. Keith F. Jensen added that existing customers represented over 90% for both SASE and SecOps, highlighting expansion sales within the existing customer base.

Q: Could you discuss geographic performance variations, particularly the deceleration in the Americas and the shrinkage in APAC? A: Keith F. Jensen pointed out that SMB performance was robust, exceeding expectations. Europe was slightly underperforming, particularly on the enterprise side, which affected their guidance midpoint slightly. The U.S. saw fluctuations due to the size and timing of large deals, while APAC's performance was impacted by strong currency fluctuations, particularly in Japan.

Q: What are your expectations for the firewall market recovery and its impact on market share dynamics? A: Keith F. Jensen discussed signs of recovery in the firewall market, noting a return to normal levels in the registration of security service contracts. Ken Xie added that despite the overall market downturn, Fortinet continues to gain market share due to its performance advantages and comprehensive security functions.

Q: How are enterprise agreements (EAs) evolving, particularly in terms of go-to-market efforts and driving these agreements in the future? A: Ken Xie highlighted that as they acquire more enterprise customers who seek long-term relationships, the interest in EAs is growing. These agreements are particularly appealing for expansions within large enterprises. Keith F. Jensen noted that EAs are becoming more relevant with the introduction of FortiPoints, aiding in long-term customer engagement and sales.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.