Fortinet Execs Confident In Investment Strategy For Growth, Despite Plummeting Stock Price After Q3 Earnings

Despite a plummeting stock price after its third-quarter earnings call Thursday, Fortinet executives said they are confident their investment strategy and growth numbers position it to continue winning vs. its competitors.

Billings for the quarter that ended Sept. 30 came in at $299.1 million, up 41 percent year over year, which is the highest growth rate the company has achieved as a public company. The billings growth was seen across all product segments, executives said, and was driven by an "ongoing healthy security market."

Revenue also was up significantly for the Sunnyvale, Calif., security vendor, rising 35 percent year over year to $260.1 million. That is the highest revenue growth rate for the company in the last three years and includes contributions from its Meru Networks acquisition, which closed July 8. Profit was $8.17 million for the quarter, up 101 percent over the same period last year.

[Related: Fortinet Mounts 'Aggressive' Marketing Push Against Security Competitors]

Founder and CEO Ken Xie said the growth signifies that the company is on the right path to success, particularly over its competitors in the market, which include Palo Alto Network and others.

"Our technology advantage is very strong and our growth strategy is working," Xie said.

One place in particular that Fortinet saw wins was in large deals and its enterprise business, Xie said. Deals more than $1 million grew 55 percent and deals more than $100,000 grew 59 percent, he said. That includes big wins over the competition, CFO Andrew Del Matto said, with a competitive win with a large bank for firewall products, a North American bank replacing its legacy firewall from a competitor with Fortinet solutions in three large data centers, and an expansion with a large international bank for high-end data center appliances and FortiGate solutions.

"We are not only winning customers from the competition, but we are keeping them," Del Matto said.

However, despite the growth, Fortinet stock plummeted more than 13 percent after the earnings report to a low of $37.50. Investors on the call said they were worried about the company's operating margins, which were lowered to a forecast of 16 percent vs. 19.3 percent, and wanted more transparency around the level of investment going forward. Investors also expressed concern over lower-than-expected product growth, which came in at 4.3 percent compared with an expected 7.8 percent.

Del Matto defended the operating margins, saying that the company sees significant opportunity ahead and is investing to capitalize on it. That includes particular investments over the next quarter in the Asia-Pacific and EMEA regions, in the midsize enterprise market, and internally in marketing expansion, although he declined to say how much those investments might amount to.

At the company's Partner Advisory Council event in Sunrise, Fla., earlier this month, executives said partners can expect an "aggressive" marketing push in the coming months to raise awareness of the Fortinet brand and tackle the competition's "glitzier" marketing practices.

"The investments are paying off. ... We continue to see demand and I believe that most of our competitors are saying the same thing. It's a unique opportunity to go after the incumbent space as well as overall growth in the security market. It's a unique opportunity that we see and, quite frankly, we're going to continue to invest," Del Matto said.

In reports after the call, analysts agreed with Fortinet's approach. Andrew Nowinski, senior research analyst at Piper Jaffray, said in a research note that investors were "concerned" over the push to increase investment, but said billings growth and a strong security market are signs to continue that strategy.

"With billings growth accelerating to record levels, it is hard to penalize them for investing in growth. If the environment was experiencing a slowdown, maintaining (or increasing) spending would not be justified, but in this environment, Fortinet should focus on growth," Nowinski said in the report.

That investment will translate into "cautious optimism" for growth in the fourth quarter, Del Matto said, with billings expected to be between $364 million and $369 million, up 30 percent year over year. Revenue for the fourth quarter is expected to be between $293 million and $298 million, he said, up 32 percent over the fourth quarter last year. He predicted operating margins would be around 16 percent, representing improved leverage while continuing to invest in growth.

For the full year, the company expects to see between $1.215 billion and $1.22 billion in billings, up 36 percent year over year. Revenue is expected to be up 31 percent to between $1.006 billion and $1.011 billion.

"Fortinet has a clear technology advantage and a strong innovative road map in place to help us continue to strengthen our market position," Xie said. "Our eyes are set on continued growth and innovation and we feel confident about the road ahead," he said.

PUBLISHED OCT. 23, 2015