Morningstar | FTNT Updated Forecasts and Estimates from 19 Mar 2019
No-moat Fortinet reported fourth quarter sales of $507 million as product and service revenue increased by 24% and 20% year over year, respectively. The company's 2018 growth of 20% was inline with our expectations while its 2019 revenue guidance of $2.06-$2.10 billion exceeded our anticipation for next year. We believe Fortinet will continue its strong growth trajectory in the upcoming years, driven by software-defined networking security sales, a shift to enterprise solutions, and its presence within the service provider market. After rolling our model and forecasting a longer period of strong growth, we are raising our fair value estimate to $75 from $70.Product revenue for the year grew by 17% (13% excluding the impact of accounting changes) and service revenue grew 23% versus 2017. Compared with 2017, billings grew by 20% to $2.15 billion. As we expected, Fortinet showcased great operating margin expansion as revenue growth outpaces its incremental marketing and development costs. Operating margin for the year increased to 12.8% from 7.4%, and we believe 2019 will be another strong year of operating margin expansion.
For 2019, Fortinet is forecasting revenue growth of 15.5% at the midpoint of expectations, with product and services growing by 9% and 19%, respectively. Billing were guided to grow to $2.45-$2.50 billion. As the lines between networking security blurs between on-premises, cloud, and endpoints, 5G build outs could open an array of opportunities to safeguard mobile, private, and Internet of Things networks. In our view, services should continue to outpace products, which drives our expected gross margin expansion towards 77% in 2019. We model operating margin to expand into the high double digits as we expect Fortinet to reel in sales and marketing expenses to under 40% of sales in 2019 due to a steady recurring revenue stream requiring lower customer acquisition costs.
Fortinet provides cybersecurity solutions. The company's product offerings consist of its FortiGate product family and its non-FortiGate products. The company's FortiGate hardware and software licenses are sold with a set of security services. These security services are enabled by FortiGuard, which provides threat research and artificial intelligence capabilities from a global cloud network to deliver protection services to each FortiGate appliance. The company's non-FortiGate products include the Fortinet Security Fabric (such as FortiAP, FortiAnalyzer, FortiSwitch and FortiManager), certain cloud security products (such as virtual machines and cloud services) and other products.
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