Fortinet: Product Refresh Is Chance To Displace Incumbents

‘Some of our competitors and legacy players have a shorter list of customers and a shorter list of products. And maybe they‘re not doing as well in the Gartner Magic Quadrant as we are, so we view that as an opportunity,’ says Fortinet CFO Keith Jensen.

Fortinet has taken advantage of more expansive security needs coming out of the pandemic to displace incumbents as organizations look to replace their traditional firewalls.

The Sunnyvale, Calif.-based platform security vendor said businesses need much more than perimeter protection from their firewalls and are seeking out vendors that offer firewalls with SD-WAN, 5G, and internal segmentation capabilities, according to founder, Chairman and CEO Ken Xie. SD-WAN and 5G security are vital in supporting home and branch office employees as remote work continues to flourish.

“It’s not as if historically you’ve seen lifts with us in terms of spikes from refresh,” Fortinet Chief Financial Officer Keith Jensen told investors Thursday. “But on the flip side, some of our competitors and legacy players have a shorter list of customers and a shorter list of products. And maybe they’re not doing as well in the Gartner Magic Quadrant as we are, so we view that as an opportunity.”

[Related: Fortinet Non-Firewall Sales Surge As Customers Opt For Fabric]

Fortinet has 500,000 customers and 70 different firewall models, which Jensen said has prompted the company to view the refresh cycle as an opportunity to displace incumbents. The company’s product sales strength in the most recent quarter spans from OT to SD-WAN, and was particularly pronounced among mid-enterprise or commercial customers, according to Jensen.

The company has seen a significant change in the architecture needed to protect an organization’s expanded IT infrastructure coming out of COVID-19, meaning that companies are looking to do far more than just refresh or replace their traditional firewall, according to Xie. Specifically, Xie said investments in secure switches and Wi-Fi can help prevent ransomware as well as other types of internal attacks.

Competitors of Fortinet have expanded their security capabilities largely through acquisition, which Xie said makes it difficult for customers to get integration and automation out of the gate and for vendors to achieve organic growth. Firewall foe Palo Alto Networks has been by far and away the most aggressive as far as M&A is concerned, spending $3.46 billion on 12 acquisitions since the start of 2018.

“We have some long-term strategic investments which gives us more advantage, whether from the ASIC chip which we started developing 21 years ago as well as other parts of the [Security] Fabric, which integrate and automate from day one,” Xie said. “We continue to have this long-term strategy, and it‘s given us long-term benefits going forward.”

Fortinet’s sales for the quarter ended June 30 soared to $801.1 million, up 29.7 percent from $617.6 million a year earlier. That crushed Seeking Alpha’s quarterly revenue projection of $744.1 million.

Net income jumped to $137.5 million, or $0.82 per diluted share, up 20.8 percent from $113.8 million, or $0.69 per diluted share. On a non-GAAP basis, net income surged to $158.7 million, or $0.95 per diluted share, up 16.2 percent from $136.6 million, or $0.83 per diluted share. That beat Seeking Alpha’s non-GAAP earnings estimate of $0.87 per share.

Fortinet’s stock fell $5.21 (1.9 percent) to $269 per share in after-hours trading. The company’s earnings were announced after the market closed Thursday.

The company’s services revenue in the quarter jumped to $502.8 million, up 23.9 percent from $405.7 million the year prior. Fortinet’s products sales skyrocketed to $298.3 million, up 40.8 percent from $211.9 million last year.

From a geographic standpoint, Fortinet’s sales in the Americas rose to $337 million, up 29.1 percent from $290.9 million the year prior. The Americas accounted for 42.1 percent of Fortinet’s revenue in the quarter, which is down slightly from 42.3 percent last year.

For the coming quarter, Fortinet expects to see diluted non-GAAP earnings of between $0.90 and $0.95 per share on revenue in the range of $800 million to $815 million. Analysts were expecting non-GAAP earnings of $0.94 per share on sales of $773.5 million, according to Seeking Alpha.