Morningstar | Services Continues to Spur Fortinet Growth; Maintaining FVE of $87
Narrow-moat Fortinet reported revenue growth of 18% year over year, in line with our expectations, which was led by continued strong demand for services. On a GAAP basis, gross margin of 76% and operating margin of 11% exceeded our forecast as Fortinet posted robust margin expansion within services and showcased prudent operating expenditure control. Fortinet continued its positive momentum in expanding into deals that are more lucrative and diversifying its customer base away from small and medium businesses. With this thesis playing out and guidance matching our previous expectations, we are maintaining our fair value estimate of $87 per share, which keeps Fortinet within 3-star territory. In the cybersecurity space, we recommend investors look toward Palo Alto Networks as an attractive investment option.Product revenue grew 14% year over year due to the shift toward selling more midrange FortiGate appliances over entry-level products while increasing the revenue from software. Services revenue increased by 21% year over year, as FortiGuard security subscriptions grew by 25% and FortiCare technical support and other services increased by 17%. Fortinet completed 35 deals worth over $1 million in the quarter, up from 34 the year before, and the dollar values of these deals increased by 20%. The company saw increased momentum with customers migrating toward around the clock support over their previous 8 hours, 5 days a week subscription, which helped attribute to the 19% year-over-year billings growth in the quarter. The 50 basis points increase in consolidated gross margin was due to service gross margins increasing to 86.2% from 84.8% year over year. We expect Fortinet to continue strong growth as it sells more mid-range, high-end, software, and services into enterprises and service providers, and we are fans of Fortinet pushing nascent products for software-defined networking and future solutions that meld aspects of networking and security together.
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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