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Fortinet, Inc. (FTNT)

Q2 2012 Results Earnings Call

July 25, 2012 04:30 PM ET


Ken Goldman - CFO

Ken Xie - Founder, President and CEO

Michelle Spolver - Vice President, Corporate Communications and IR


Walter Pritchard - Citi

Jonathan Ho - William Blair

Erik Suppiger - JMP Securities

Lauren Choi - JPMorgan

Keith Weiss - Morgan Stanley

Brent Thill - UBS

Jayson Nolan - Robert Baird

Jonathan Ruykhaver - Morgan Keegan

Rick Sherlund - Nomura

Brian Freed - Wunderlich Securities

Tal Liani - Bank of America Merrill Lynch

Rohit Chopra - Wedbush Securities

Dan Cummins - Think Equity



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Good day, ladies and gentlemen and welcome to the Fortinet second quarter 2012 earnings announcement. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Ms. Michelle Spolver, Vice President, Corporate Communications and Investor Relations. Ma'am, you may begin.

Michelle Spolver

Thank you. Good afternoon and thank you for joining us on this conference call today to discuss Fortinet's financial and operating results for the second quarter of 2012. With me today are Fortinet's Founder, President and CEO, Ken Xie and CFO, Ken Goldman. In terms of the structure of the call, Ken Goldman will begin a review of the operating results before turning the call over to Ken Xie to provide additional perspective on our business. Ken Goldman will then conclude with some thoughts on our outlook for the third quarter and full year of 2012 before we open up the call for questions.

As a reminder, today we're holding two calls. Following this call, we will hold a second conference call to provide an opportunity for financial analysts and investors to ask more detailed financial questions. The second call will begin at 3.30 pm Pacific time which will also be webcast from our Investor Relations website and is accessible and detailed in our earnings release.

Before we begin, let me read the disclaimer. Please note that some of the comments we make today are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Please refer to our SEC filings, in particular, the risk factors described in our Form-10K and 10Q for more information. Our forward-looking statements reflect our opinions only as of the date of this presentation and we undertake no obligation as specifically disclaims -- any obligation to update forward-looking statements.

Also please note that we'll be discussing certain non-GAAP financial measures on this call. Our GAAP results and GAAP to non-GAAP reconciliation can be found in our earnings press release and on slide 15 and 16 of today's presentation that accompanies our remarks. Please refer to our Investor Relations section of our website at for important information including our earnings press release issued a few minutes ago and slides that accompany today's prepared remarks. A replay of this call will be available on our website. Note that we duly post information on our Investor Relations' website and we encourage you to make use of that resource.

I will now turn the call over to Ken Goldman to review Fortinet's second quarter operating results.

Ken Goldman

Well, nice job, Michelle. By the way I noticed how she shortens it when she has to present versus myself. And for those that have asked, I've actually reduced some of my comments to make it a little bit more condensed, which I think all of you would be probably happy with.

But let me first start off and say that Fortinet delivered a strong second quarter. While we are concerned about the economic environment and though I don't want to say we're immune to it, I will say that demand for security and Fortinet solutions in particular remain solid in the quarter. We execute well across all three geographies.

Our future financial results clearly reflect this and we again perform well in a number of key metrics including; billings, $146 million which grew 32% year-over-year, highest growth rate achieved since Q1 2011 and exceeded guidance of $136 million to $140 million. Revenues were $129 million, up 25% year-over-year and also exceed our guidance range. We witnessed strong revenue growth across all geographies.

Product revenue grew 32% year-over-year. Operating income was $28 million, increase of 28% year-over-year even as we invested aggressively again in R&D, sales and customer support headcount. Earnings per share were $0.12 in line with guidance as again we made hiring and other investments that we had planned for. Free cash flow came in at $41 million, exceeding our guidance range of $35 million to $40 million as we ended Q2 with a cash balance of $644 million.

Finally, deal sizes got larger and our high-end price increased to 35% of total billings. We won several deals with Fortune 50 companies across a number of key verticals. This is the eleventh quarter as a publicly traded company where we achieved upbeat guidance expectations and we did (inaudible) met some challenging economic times. Let me reiterate some of the main reasons why.

First, our strong technology vision and business strategy and we're executing well against this. Second, our business is diverse in terms of product segmentation, vertical breadth and geographic reach and we are [embarking] a strong new product cycle. Our customer target base is broad and our Fortinet FortiGate offering is being deployed in a variety of ways whereas the core next generation standalone firewall, a full blown UTM solution or managed security services offering. Thus we were able to compete and win numerous types of deals. This is a key differentiable advantage for Fortinet because it provides us a large addressable market.

Third, we are leading the innovations, delivering the highest performance security products in the market to our custom ASICs which provide a significant advantage that none of our competitors can offer. High performance and low latency are factors in a majority of our enterprise and high-end wins. Four, we also have a strong cohesive senior team who has worked together for numerous years, including two (inaudible) in top positions who have great passion of the business and has established track record of success.

And finally we are benefiting from market trends such as network security growth, virtualization and mobility as well as increases in network performance and bandwidth-intensive applications that require high performance security in the enterprise and high-end environments.

The momentum for Fortinet is strong. We plan on maintaining this by continuing best in R&D and sales and marketing infrastructure. We have an excellent track record in defining and running our own playbook for long-term success. Our consistently strong performance illustrates our strategy is working and we are effectively executing against this plan.

Looking to the future, we are very excited about the upcoming launch of our new FortiOS 5.0 operating system, the next generation ASICs which we expect to further enhance our market leading position and maintain a momentum. Ken will talk more about this in his remarks.

So now let me go through the second quarter results in more detail. I'll now talk about income statement relative to Q2. Billings is noted with $146 million, an increase of $36 million or 32% year-over-year that exceeded our guidance range of $136 million to $140 million. A solid increase of new enterprise multiyear deals coupled with strong service and renewals in Q2 contribute to a $17 million increase in the deferred revenue balance. As a reminder, we bill world-wide US dollars, so our bill is not impacted by FX fluctuations.

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