Fortinet's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Fortinet Inc. (FTNT)

Q1 2012 Earnings Call

April 24, 2012 04:30 pm ET

Executives

Ken Goldman - CFO

Ken Xie - Founder, President and CEO

Analysts

Michael Turitz - Raymond James

Keith Weiss - Morgan Stanley

Rich Sherlund - Nomura

Sterling Auty - JPMorgan

Walter Pritchard - Citi

Erik Suppiger - JMP Securities

Brent Thill - UBS

Robert Breza - RBC Capital Markets

Jonathan Ho - William Blair

Aaron Schwartz - Jefferies

Scott Zeller - Needham & Company

Jayson Noland - Robert Baird

Phil Rueppel - Wells Fargo Securities

Brian Freed - Wunderlich Securities

Presentation

Operator

Good day, ladies and gentlemen and thank you for standing by and welcome to the Fortinet Q1 2012 earnings announcement conference call. (Operator Instructions) As a reminder, today's conference may be recorded.

And now I will turn the floor over to Ken Goldman. Sir, the floors is yours.

Ken Goldman

Great, thank you and good afternoon for all of you joining us for this conference call to discuss Fortinet’s financial and operating results for the first quarter of 2012. Joining me today are Ken Xie, Founder, President, and CEO; and Michelle Spolver, Vice President of Corporate Communications.

In terms of structure of the call, I will begin with a review of our operating results before I turn the call over to Ken to provide additional perspective of the performance of our business. I will then conclude with some thoughts on our outlook for the second quarter and full-year 2012 before we open up for the questions.

As a reminder today, again we are 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. Second call will begin at 03:30 PM Pacific Time and will also be webcast from our Investor Relations website and is accessible as detailed in the earnings release.

Let me also start with this disclaimer and Safe Harbor statement. Please note some of the comments we make today are forward-looking statements, including those regarding our financial guidance for the second quarter of fiscal 2012, ability to execute on our 2011 momentum, market opportunities and our pipeline; expectations regarding product sales, deferred revenue balance, renewals, service revenues, product revenues and ratable on other revenue; impact of investments on our sales and R&D; expectations regarding inventory levels and our hiring trends; and expectations around our competitive position, benefit from market trends, market share and market share gains in general by geography, macro-economic environment and demand for security solutions.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Please refer to our SEC filings, in particular, risk factors described in our Forms 10-K and 10-Q for more information on these risks and uncertainties and you know the limitations that apply to our forward-looking statements. Copies can be obtained from the SEC or by visiting the Investor Relations section of our website.

All forward-looking statements reflect our opinions only as of the date of this presentation. And we undertake no obligations and specifically disclaim any obligation to update forward-looking statements.

Also please note that we will be discussing certain non-GAAP financial measures on this call. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release and on slides 14, 15 in the presentation that accompanies today’s prepared remarks. Please refer to investor.fortinet.com 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 also be available on our website.

So with that let me now talk to the Q1 results. We are pleased to report that Fortinet exhibited strong performance to start the year having again met or exceeded our expectations regarding all of our key metrics including billings, revenue, profitability and free cash flow. Our performance was driven by healthy business environment and continued demand for our core network security parts across all major geographies, the early acceptance of some of our recently launched products and by leveraging investments we have made in our sales and marketing teams.

Fortinet continues to increase market share by offering parts with speed to keep up with the real-world traffic, that powered (inaudible) complex IT infrastructures and the high performance that our customers demand. In addition to rolling out new mid-range and high-end products we demonstrated through third-party tests that our FortiGate-5140B is the world's fastest firewall.

Furthermore our new line of DDoS appliances which we announced this morning broaden our solutions portfolio and provide us with additional functionalities we can offer to our customers. As you will see from my numbers billings grew fast, the reported revenues in 1Q which is a good leading indicator of future business. Additionally product revenue grew faster year-to-year in total revenues thus indicating strength of product sales to new and existing customers.

One thing to note is 1Q12 revenues is under (inaudible) revenue recognition rules as we had in 1Q of last year. As you'll recall 2011 we got a bump in product revenue as a result of adopting new revenue recognition rules as that revenue also flat and the seasonality impact or effect we encountered in Q1 '11 compared to Q4 '10. In 2012 we actually encountered negative effect and in that we will see a decline in ratable revenue contributions.

Still okay. Before diving into financials of the first quarter I would like to highlight the performance of some of our regions and the business drivers that helped us succeed our goals this quarter. First our strong performance in North America was led by sales enterprise customers in the US along with continued strength in Latin America. We continue to win large core enterprise firewall deals with enterprises, PCI regulation compliance continue to drive business in retail and vertical and we benefited from contributions from both new and existing customers during the first quarter.

Second the (inaudible) has continued to show increasing strength and experienced the strongest growth in Q4 2010 despite the challenges in local economies. Billings of region accelerated nicely. We have a strong team in place and continue to grow and take market share there. In particular we saw a very strong performance in the UK and France, business drivers during the quarter were the continued driver of Fortinet's high performance firewall in UTM solutions especially among large enterprises and carriers.

Additionally we had strong runrate business and service contract renewals from existing customers. Third, we also did well in Asia Pac and saw a very strong growth in Japan as well as Korea. Across Asia-Pacific we have started to win more business with large enterprise accounts who were selecting our consolidated and security solutions and high-performance firewalls to secure their infrastructure. And fourth, we continue to benefit from market trends such as virtualization and network security mobility as well as the increases in network performance and bandwidth intensive applications that require high performance security in the enterprise and high-end environments. Overall we executed well in the first quarter and our financial results demonstrate this.

Let me now provide some high-level thoughts on the first quarter. In terms of some of the key numbers you can see them on slide number three. Billings were a $137 million, an increase of 28% year-to-year exceeding guidance of $122 million to $127 million. As a reminder we still, we bill worldwide in US dollars, so our billings and revenue are not impacted by FX fluctuations.

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