Fortinet Earnings: Tepid Billings Expansion and Guidance Falls Short of Investors’ High Expectations

We maintain our $68 fair value estimate for wide-moat Fortinet FTNT after the company reported mixed financial results indicating a cooling demand for its cybersecurity solutions. The firm’s quarter was marred by a slowdown in billings, a forward-looking indicator, as macro headwinds caught up with Fortinet. With shares down more than double digits afterhours, it is evident that the financial results were not what investors expected. At the same time, however, we believe some of the selling activity is overly punitive. Our Fortinet thesis is underpinned by our understanding that the firm’s breadth of solutions, coupled with secular tailwinds such as a strong demand for security solutions, shift-to-cloud, and vendor consolidation, will allow Fortinet to deliver shareholder value in the long term. While macro headwinds may be cause for concern to investors seeking to trade the stock on a near-term basis, we believe Fortinet’s business stands to be a long-term winner in the security space. Following the afterhours selloff, we view Fortinet as fairly valued and trading in the 3-star range.

Fortinet’s sales came in at $1.293 billion, up 26% year over year and just shy of our $1.299 billion estimate. In the last few quarters, we have seen product revenue spearhead sales growth for the firm. This quarter, however, we saw service sales lead the charge, expanding 30% year over year to $820 million. We believe the metric that investors were particularly unimpressed with was billings, a forward-looking metric indicating the demand pipeline Fortinet is building. While billings grew 18% year over year, this was a marked deceleration from the roughly mid-30s% growth rate in the last few quarters. We attribute this deceleration to macroeconomic headwinds that led to deals being pushed out, affecting billings.