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Fortinet Reports First Quarter 2023 Financial Results
First Quarter 2023 Highlights
- Product revenue of
$500.7 million , up 35% year over year - Service revenue of
$761.6 million , up 30% year over year - Total revenue of
$1.26 billion , up 32% year over year - Billings of
$1.50 billion , up 30% year over year1 - Deferred revenue of
$4.88 billion , up 33% year over year - GAAP operating income of
$273.5 million , up 81% year over year - Non-GAAP operating income of
$334.0 million , up 59% year over year1 - GAAP operating margin of 21.7%
- Non-GAAP operating margin of 26.5%1
- GAAP diluted net income per share attributable to
Fortinet, Inc. of$0.31 , up 82% year over year2 - Non-GAAP diluted net income per share attributable to
Fortinet, Inc. of$0.34 , up 79% year over year1,2 - Cash flow from operations of
$677.5 million - Free cash flow of
$647.2 million 1
“Revenue growth in the first quarter was 32% due to strong growth in both product and service revenue. With 35% product revenue growth, we continue to gain market share while being a leading product revenue company in the cybersecurity industry. Service revenue grew over 30% for the first time in a quarter in six years. We believe we have a significant opportunity to continue to grow service revenue by upselling value-added security services to our large installed base of customers,” said
Financial Highlights for the First Quarter of 2023
- Product Revenue: Product revenue was
$500.7 million for the first quarter of 2023, an increase of 35.0% compared to$371.0 million for the same quarter of 2022.
- Service Revenue: Service revenue was
$761.6 million for the first quarter of 2023, an increase of 30.5% compared to$583.8 million for the same quarter of 2022.
- Revenue: Total revenue was
$1.26 billion for the first quarter of 2023, an increase of 32.2% compared to$954.8 million for the same quarter of 2022.
- Billings1: Total billings were
$1.50 billion for the first quarter of 2023, an increase of 29.6% compared to$1.16 billion for the same quarter of 2022.
- Deferred Revenue: Total deferred revenue was
$4.88 billion as ofMarch 31, 2023 , an increase of 33.4% compared to$3.66 billion as ofMarch 31, 2022 .
- GAAP Operating Income and Margin: GAAP operating income was
$273.5 million for the first quarter of 2023, representing a GAAP operating margin of 21.7%. GAAP operating income was$151.0 million for the same quarter of 2022, representing a GAAP operating margin of 15.8%.
- Non-GAAP Operating Income and Margin1: Non-GAAP operating income was
$334.0 million for the first quarter of 2023, representing a non-GAAP operating margin of 26.5%. Non-GAAP operating income was$210.2 million for the same quarter of 2022, representing a non-GAAP operating margin of 22.0%.
- GAAP Net Income and Diluted Net Income Per Share Attributable to
Fortinet, Inc. 2: GAAP net income was$247.7 million for the first quarter of 2023, compared to GAAP net income of$138.4 million for the same quarter of 2022. GAAP diluted net income per share was$0.31 for the first quarter of 2023, based on 793.4 million diluted weighted-average shares outstanding, compared to GAAP diluted net income per share of$0.17 for the same quarter of 2022, based on 820.8 million diluted weighted-average shares outstanding.
- Non-GAAP Net Income and Diluted Net Income Per Share Attributable to
Fortinet, Inc. 1,2: Non-GAAP net income was$269.7 million for the first quarter of 2023, compared to non-GAAP net income of$155.1 million for the same quarter of 2022. Non-GAAP diluted net income per share was$0.34 for the first quarter of 2023, based on 793.4 million diluted weighted-average shares outstanding, compared to$0.19 for the same quarter of 2022, based on 820.8 million diluted weighted-average shares outstanding.
- Cash Flow: Cash flow from operations was
$677.5 million for the first quarter of 2023, compared to$396.1 million for the same quarter of 2022.
- Free Cash Flow1: Free cash flow was
$647.2 million for the first quarter of 2023, compared to$273.5 million for the same quarter of 2022.
- Share Repurchase Program: In
April 2023 , Fortinet’s board of directors authorized a$1.0 billion increase in the authorized stock repurchase under our share repurchase program. As ofMay 4, 2023 , approximately$1.53 billion remained available for future share repurchases.
Guidance
For the second quarter of 2023,
- Revenue in the range of
$1.280 billion to$1.320 billion - Billings in the range of
$1.560 billion to$1.600 billion - Non-GAAP gross margin in the range of 75.5% to 76.5%
- Non-GAAP operating margin in the range of 24.5% to 25.5%
- Diluted non-GAAP net income per share attributable to
Fortinet, Inc. in the range of$0.33 to$0.35 , assuming a non-GAAP effective tax rate of 17%. This assumes a diluted share count of 790 million to 800 million.
For the fiscal year 2023,
- Revenue in the range of
$5.425 billion to$5.485 billion - Service revenue in the range of
$3.370 billion to$3.400 billion - Billings in the range of
$6.750 billion to$6.810 billion - Non-GAAP gross margin in the range of 75.0% to 76.0%
- Non-GAAP operating margin in the range of 25.0% to 26.0%
- Diluted non-GAAP net income per share attributable to
Fortinet, Inc. in the range of$1.44 to$1.48 , assuming a non-GAAP effective tax rate of 17%. This assumes a diluted share count of 795 million to 805 million.
These statements are forward looking and actual results may differ materially. Refer to the Forward-Looking Statements section below for information on the factors that could cause our actual results to differ materially from these forward-looking statements.
Our guidance with respect to non-GAAP financial measures excludes stock-based compensation, amortization of acquired intangible assets and gain on intellectual property matters. We have not reconciled our guidance with respect to non-GAAP financial measures to the corresponding GAAP measures because certain items that impact these measures are uncertain or out of our control, or cannot be reasonably predicted. Accordingly, a reconciliation of these non-GAAP financial measures to the corresponding GAAP measures is not available without unreasonable effort.
1 A reconciliation of GAAP to non-GAAP measures has been provided in the financial statement tables included in this press release. An explanation of these measures is also included below under the heading “Non-GAAP Financial Measures”.
2 All share and per share amounts presented herein have been retroactively adjusted to reflect the five-for-one forward stock split which was effective
Conference Call Details
Second Quarter 2023 Conference Participation Schedule:
- J.P. Morgan Global
Technology, Media and Communications Conference
May 23, 2023
Bank of America Global Technology Conference
June 6, 2023
Members of Fortinet’s management team are expected to present at these conferences and discuss the latest company strategies and initiatives. Fortinet’s conference presentations are expected to be available via webcast on the company’s web site. To access the most updated information, pre-register and listen to the webcast of each event, please visit the Investor Presentation & Events page of Fortinet’s website at https://investor.fortinet.com/events-and-presentations. The schedule is subject to change.
About
Copyright © 2023 Fortinet, Inc. All rights reserved. The symbols ® and ™ denote respectively federally registered trademarks and common law trademarks of
FTNT-F
Forward-Looking Statements
This press release contains forward-looking statements that involve risks and uncertainties. These forward-looking statements include statements regarding any indications related to future market share gains, guidance and expectations around future financial results, including guidance and expectations for the second quarter and full year 2023, statements regarding the momentum in our business and future growth expectations, statements regarding the opportunity to grow service revenue, and any statements regarding our market opportunity and market size, and business momentum. Although we attempt to be accurate in making forward-looking statements, it is possible that future circumstances might differ from the assumptions on which such statements are based such that actual results are materially different from our forward-looking statements in this release. Important factors that could cause results to differ materially from the statements herein include the following: general economic risks, including those caused by economic challenges, a possible economic downturn or recession and the effects of inflation or stagflation, rising interest rates or reduced information technology spending; instability in the global banking system; supply chain challenges due to the current global environment; negative impacts from the COVID-19 pandemic on sales, billings, revenue, demand and buying patterns, component supply and ability to manufacture products to meet demand in a timely fashion, and costs such as possible increased costs for shipping and components; the ongoing war in
Non-GAAP Financial Measures
We have provided in this release financial information that has not been prepared in accordance with
Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures provided in the financial statement tables below.
Billings (non-GAAP). We define billings as revenue recognized in accordance with GAAP plus the change in deferred revenue from the beginning to the end of the period less any deferred revenue balances acquired from business combination(s) during the period. We consider billings to be a useful metric for management and investors because billings drive current and future revenue, which is an important indicator of the health and viability of our business. There are a number of limitations related to the use of billings instead of GAAP revenue. First, billings include amounts that have not yet been recognized as revenue and are impacted by the term of security and support agreements. Second, we may calculate billings in a manner that is different from peer companies that report similar financial measures. Management accounts for these limitations by providing specific information regarding GAAP revenue and evaluating billings together with GAAP revenue.
Free cash flow (non-GAAP). We define free cash flow as net cash provided by operating activities minus purchases of property and equipment and excluding any significant non-recurring items. We believe free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business that, after capital expenditures and net of proceeds from intellectual property matter, can be used for strategic opportunities, including repurchasing outstanding common stock, investing in our business, making strategic acquisitions and strengthening the balance sheet. A limitation of using free cash flow rather than the GAAP measures of cash provided by or used in operating activities, investing activities, and financing activities is that free cash flow does not represent the total increase or decrease in the cash and cash equivalents balance for the period because it excludes cash flows from significant non-recurring items, investing activities other than capital expenditures and cash flows from financing activities. Management accounts for this limitation by providing information about our capital expenditures and other investing and financing activities on the face of the cash flow statement and under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in our most recent Quarterly Report on Form 10-Q and Annual Report on Form 10-K and by presenting cash flows from investing and financing activities in our reconciliation of free cash flow. In addition, it is important to note that other companies, including companies in our industry, may not use free cash flow, may calculate free cash flow in a different manner than we do or may use other financial measures to evaluate their performance, all of which could reduce the usefulness of free cash flow as a comparative measure.
Non-GAAP operating income and operating margin. We define non-GAAP operating income as operating income plus stock-based compensation, impairment and amortization of acquired intangible assets, less gain on intellectual property matter and, when applicable, other significant non-recurring items in a given quarter. Non-GAAP operating margin is defined as non-GAAP operating income divided by GAAP revenue. We consider these non-GAAP financial measures to be useful metrics for management and investors because they exclude the items noted above so that our management and investors can compare our recurring core business operating results over multiple periods. There are a number of limitations related to the use of non-GAAP operating income instead of operating income calculated in accordance with GAAP. First, non-GAAP operating income excludes the items noted above. Second, the components of the costs that we exclude from our calculation of non-GAAP operating income may differ from the components that peer companies exclude when they report their non-GAAP results of operations. Management accounts for these limitations by providing specific information regarding the GAAP amounts excluded from non-GAAP operating income and evaluating non-GAAP operating income together with operating income calculated in accordance with GAAP.
Non-GAAP net income and diluted net income per share attributable to
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions)
2023 |
2022 |
||||||
| ASSETS | |||||||
| CURRENT ASSETS: | |||||||
| Cash and cash equivalents | $ | 2,304.2 | $ | 1,682.9 | |||
| Short-term investments | 548.8 | 502.6 | |||||
| Marketable equity securities | 26.1 | 25.5 | |||||
| Accounts receivable—net | 1,087.2 | 1,261.7 | |||||
| Inventory | 302.7 | 264.6 | |||||
| Prepaid expenses and other current assets | 89.7 | 73.1 | |||||
| Total current assets | 4,358.7 | 3,810.4 | |||||
| 15.6 | 45.5 | ||||||
| PROPERTY AND EQUIPMENT—NET | 917.4 | 898.5 | |||||
| DEFERRED CONTRACT COSTS | 536.9 | 518.2 | |||||
| DEFERRED TAX ASSETS | 649.6 | 569.4 | |||||
| GOODWILL AND OTHER INTANGIBLE ASSETS—NET | 178.9 | 184.0 | |||||
| OTHER ASSETS | 175.2 | 202.0 | |||||
| TOTAL ASSETS | $ | 6,832.3 | $ | 6,228.0 | |||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | |||||||
| CURRENT LIABILITIES: | |||||||
| Accounts payable | $ | 238.4 | $ | 243.4 | |||
| Accrued liabilities | 346.7 | 266.3 | |||||
| Accrued payroll and compensation | 213.4 | 219.4 | |||||
| Deferred revenue | 2,463.3 | 2,349.3 | |||||
| Total current liabilities | 3,261.8 | 3,078.4 | |||||
| DEFERRED REVENUE | 2,417.6 | 2,291.0 | |||||
| INCOME TAX LIABILITIES | 70.5 | 67.8 | |||||
| LONG-TERM DEBT | 990.9 | 990.4 | |||||
| OTHER LIABILITIES | 80.1 | 82.0 | |||||
| Total liabilities | 6,820.9 | 6,509.6 | |||||
| COMMITMENTS AND CONTINGENCIES | |||||||
| STOCKHOLDERS’ EQUITY (DEFICIT): | |||||||
| Common stock | 0.8 | 0.8 | |||||
| Additional paid-in capital | 1,327.4 | 1,284.2 | |||||
| Accumulated other comprehensive loss | (18.1 | ) | (20.2 | ) | |||
| Accumulated deficit | (1,298.7 | ) | (1,546.4 | ) | |||
| Total stockholders’ equity (deficit) | 11.4 | (281.6 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | $ | 6,832.3 | $ | 6,228.0 | |||
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in millions, except per share amounts)
| Three Months Ended | |||||||
2023 |
2022 |
||||||
| REVENUE: | |||||||
| Product | $ | 500.7 | $ | 371.0 | |||
| Service | 761.6 | 583.8 | |||||
| Total revenue | 1,262.3 | 954.8 | |||||
| COST OF REVENUE: | |||||||
| Product | 193.6 | 161.0 | |||||
| Service | 114.2 | 92.8 | |||||
| Total cost of revenue | 307.8 | 253.8 | |||||
| GROSS PROFIT: | |||||||
| Product | 307.1 | 210.0 | |||||
| Service | 647.4 | 491.0 | |||||
| Total gross profit | 954.5 | 701.0 | |||||
| OPERATING EXPENSES: | |||||||
| Research and development | 151.1 | 124.9 | |||||
| Sales and marketing | 478.3 | 387.6 | |||||
| General and administrative | 52.8 | 38.6 | |||||
| Gain on intellectual property matter | (1.2 | ) | (1.1 | ) | |||
| Total operating expenses | 681.0 | 550.0 | |||||
| OPERATING INCOME | 273.5 | 151.0 | |||||
| INTEREST INCOME | 20.6 | 1.3 | |||||
| INTEREST EXPENSE | (5.0 | ) | (4.5 | ) | |||
| OTHER INCOME (EXPENSE)—NET | 2.0 | (9.1 | ) | ||||
| INCOME BEFORE INCOME TAXES AND LOSS FROM EQUITY METHOD INVESTMENT | 291.1 | 138.7 | |||||
| PROVISION FOR (BENEFIT FROM) INCOME TAXES | 21.3 | (8.1 | ) | ||||
| LOSS FROM EQUITY METHOD INVESTMENT | (22.1 | ) | (8.5 | ) | |||
| NET INCOME INCLUDING NON-CONTROLLING INTERESTS | 247.7 | 138.3 | |||||
| Less: NET LOSS ATTRIBUTABLE TO NON-CONTROLLING INTERESTS, NET OF TAX | — | (0.1 | ) | ||||
| NET INCOME ATTRIBUTABLE TO FORTINET, INC. | $ | 247.7 | $ | 138.4 | |||
| Net income per share attributable to |
|||||||
| Basic | $ | 0.32 | $ | 0.17 | |||
| Diluted | $ | 0.31 | $ | 0.17 | |||
| Weighted-average shares used to compute net income per share attributable to |
|||||||
| Basic | 783.2 | 803.4 | |||||
| Diluted | 793.4 | 820.8 | |||||
(a) All share and per share amounts presented herein have been retroactively adjusted to reflect the five-for-one forward stock split which was effective
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
| Three Months Ended | |||||||
2023 |
2022 |
||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
| Net income including non-controlling interests | $ | 247.7 | $ | 138.3 | |||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
| Stock-based compensation | 56.3 | 53.2 | |||||
| Amortization of deferred contract costs | 62.5 | 52.5 | |||||
| Depreciation and amortization | 27.5 | 25.5 | |||||
| Amortization of investment premiums (discounts) | (0.3 | ) | 1.7 | ||||
| Loss from equity method investment | 22.1 | 8.5 | |||||
| Other | 3.8 | 8.4 | |||||
| Changes in operating assets and liabilities, net of impact of business combinations: | |||||||
| Accounts receivable—net | 171.1 | 15.4 | |||||
| Inventory | (45.3 | ) | (13.5 | ) | |||
| Prepaid expenses and other current assets | (16.0 | ) | (26.0 | ) | |||
| Deferred contract costs | (81.2 | ) | (66.6 | ) | |||
| Deferred tax assets | (81.1 | ) | (87.6 | ) | |||
| Other assets | 4.5 | (20.6 | ) | ||||
| Accounts payable | (4.1 | ) | 35.5 | ||||
| Accrued liabilities | 80.0 | 68.2 | |||||
| Accrued payroll and compensation | (6.0 | ) | (13.6 | ) | |||
| Other liabilities | (4.7 | ) | 11.3 | ||||
| Deferred revenue | 240.7 | 205.5 | |||||
| Net cash provided by operating activities | 677.5 | 396.1 | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
| Purchases of investments | (207.2 | ) | (385.2 | ) | |||
| Sales of investments | — | 3.0 | |||||
| Maturities of investments | 195.0 | 459.4 | |||||
| Purchases of property and equipment | (30.3 | ) | (122.6 | ) | |||
| Other | 0.1 | — | |||||
| Net cash used in investing activities | (42.4 | ) | (45.4 | ) | |||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
| Repurchase and retirement of common stock | — | (691.2 | ) | ||||
| Proceeds from issuance of common stock | 21.2 | 11.0 | |||||
| Taxes paid related to net share settlement of equity awards | (34.5 | ) | (64.8 | ) | |||
| Other | (0.4 | ) | (1.0 | ) | |||
| Net cash used in financing activities | (13.7 | ) | (746.0 | ) | |||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | (0.1 | ) | (0.3 | ) | |||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 621.3 | (395.6 | ) | ||||
| CASH AND CASH EQUIVALENTS—Beginning of period | 1,682.9 | 1,319.1 | |||||
| CASH AND CASH EQUIVALENTS—End of period | $ | 2,304.2 | $ | 923.5 | |||
Reconciliations of non-GAAP results of operations measures to the nearest comparable GAAP measures
(Unaudited, in millions, except per share amounts)
Reconciliation of GAAP operating income to non-GAAP operating income, operating margin, net income attributable to
| Three Months Ended | |||||||
2023 |
2022 |
||||||
| Reconciliation of non-GAAP operating income: | |||||||
| GAAP operating income | $ | 273.5 | $ | 151.0 | |||
| GAAP operating margin | 21.7 | % | 15.8 | % | |||
| Add back: | |||||||
| Stock‐based compensation | 57.0 | 53.9 | |||||
| Amortization of acquired intangible assets | 4.7 | 6.4 | |||||
| Gain on intellectual property matter | (1.2 | ) | (1.1 | ) | |||
| Non‐GAAP operating income | $ | 334.0 | $ | 210.2 | |||
| Non‐GAAP operating margin | 26.5 | % | 22.0 | % | |||
| Reconciliation of non-GAAP net income attributable to |
|||||||
| GAAP net income attributable to |
$ | 247.7 | $ | 138.4 | |||
| Add back: | |||||||
| Stock‐based compensation | 57.0 | 53.9 | |||||
| Amortization of acquired intangible assets | 4.7 | 6.4 | |||||
| Gain on intellectual property matter | (1.2 | ) | (1.1 | ) | |||
| Tax adjustment (a) | (38.5 | ) | (41.7 | ) | |||
| Adjustments attributable non-controlling interests (b) | — | (0.8 | ) | ||||
| Non-GAAP net income attributable to |
$ | 269.7 | $ | 155.1 | |||
| Non-GAAP net income per share attributable to |
|||||||
| Non-GAAP net income attributable to |
$ | 269.7 | $ | 155.1 | |||
| Non-GAAP shares used in diluted net income per share attributable to |
793.4 | 820.8 | |||||
| Non-GAAP net income per share attributable to |
$ | 0.34 | $ | 0.19 | |||
| Reconciliation of non-GAAP net income per share attributable to |
|||||||
| GAAP net income per share attributable to |
$ | 0.31 | $ | 0.17 | |||
| Add back: | |||||||
| Non-GAAP adjustments to net income per share attributable to |
0.03 | 0.02 | |||||
| Non-GAAP net income per share attributable to |
$ | 0.34 | $ | 0.19 | |||
(a) Non-GAAP financial information is adjusted to an effective tax rate of 17% in the three months ended
(b) Adjustments related to the non-GAAP results attributable to non-controlling interests, which were adjusted to an effective tax rate of 31% for the subsidiary of
(c) All share and per share amounts presented herein have been retroactively adjusted to reflect the five-for-one forward stock split which was effective
Reconciliation of net cash provided by operating activities to free cash flow
| Three Months Ended | |||||||
2023 |
2022 |
||||||
| Net cash provided by operating activities | $ | 677.5 | $ | 396.1 | |||
| Less: Purchases of property and equipment | (30.3 | ) | (122.6 | ) | |||
| Free cash flow | $ | 647.2 | $ | 273.5 | |||
| Net cash used in investing activities | $ | (42.4 | ) | $ | (45.4 | ) | |
| Net cash used in financing activities | $ | (13.7 | ) | $ | (746.0 | ) | |
Reconciliation of total revenue to total billings
| Three Months Ended | |||||
2023 |
2022 |
||||
| Total revenue | $ | 1,262.3 | $ | 954.8 | |
| Add: Change in deferred revenue | 240.6 | 205.0 | |||
| Total billings | $ | 1,502.9 | $ | 1,159.8 | |
| Investor Contact: | Media Contact: | |
| 408-331-4595 | 408-235-7700 | |
| psalkowski@fortinet.com | pr@fortinet.com |
Source: Fortinet, Inc.