Fortinet Sales Growth Slows as Enterprise Deals Get DelayedShorter Average Contrast Duration, Deal Delays Force Fortinet to Cut Sales Forecast
A delay in finalizing enterprise deals and a shorter average contract duration have forced Fortinet to lower its sales forecast going forward.
The Silicon Valley-based platform security vendor said average contract length shortened from 29.5 months to 28 months in the fiscal quarter ended June 30, which Chief Financial Officer Keith Jensen said took a bite out of Fortinet's billings growth. But Jensen expects Fortinet's growth to slow to pre-pandemic levels due to delays in closing deals and less purchasing in excess as supply chain pressures subside (see: Fortinet Weathers Economic Storm by Helping Users Cut Costs).
"Having some level of enterprise deals push to future quarters is not unusual," Jensen told investors Thursday. "In Q2 '23, however, an unusually large volume of deals that we expected to close in June instead pushed to future periods."
Jensen factored in the "new development" of deals pushing to future quarters when setting Fortinet's guidance for the fiscal quarter ending Sept. 30 as well as a "tough compare" for the fiscal quarter ending Dec. 31, due to the company's strong performance in the final quarter of last year. He expects Fortinet's growth to recover in late 2024 as the economy improves and the company faces easier comparisons.
"The question becomes, 'Is there something about the macroeconomy that's causing enterprises to push out spending a little bit?'" Jensen asked. "Or is it an area that we need to improve on in terms of how we go about our own internal inspection and forecasting and looking at the details? We'll know more about that as time goes on."
Manufacturing, Government Lead While Retail Lags
Fortinet's performance varied considerably by vertical, with manufacturing billings increasing by nearly 50% and government and construction billings up more than 30% due to flush budgets and a rapidly evolving threat landscape, Jensen said. Conversely, service providers billings were up just 1% while retail billings fell by 5%. CEO Ken Xie said retail billings haven't kept pace with emerging security services.
"Retail is really a very clear indicator since it's one of the first verticals to be impacted by a slowing economy," Jensen said. "But it's also this concept of digestion. There was a lot of purchasing around SD-WAN technologies and implementations a year ago. You saw very, very high growth a year ago, and now they're going through a digestive period such to point that there's actually negative growth in retail."
In the big picture, Jensen said, Fortinet's long-term demand drivers remain solid as CIOs continue to prioritize and invest in security. Regulatory requirements such as those recently announced by the Securities and Exchange Commission and the European Union's Cyber Resilience Act enacted in early 2023 will force organizations to further increase their security investments to comply with stringent regulations (see: SEC Votes to Require Material Incident Disclosure in 4 Days).
"We continue to execute our long-term strategy and remain confident in our strategies and our solution," Jensen said. "While it's a little early to be providing guidance for next year, we would expect our near-term performance will represent the short-term trough."
Sales, Outlook Miss Expectations
|Category||Q2 2023||Q2 2022||% Change|
|Earnings Per Diluted Share||$0.33||$0.21||57.1%|
|Non-GAAP Net Income||$300.4M||$194.1M||54.8%|
|Non-GAAP Earnings Per Share||$0.38||$0.24||58.3%|
Fortinet's revenue of $1.29 billion in the quarter ended June 30 fell short of Seeking Alpha's sales estimate of $1.3 billion. Meanwhile, the company's non-GAAP earnings of $0.38 per share beat Seeking Alpha's non-GAAP estimate of $0.34 per share.
The company's stock is down $12.51 - 16.51% - to $63.25 per share in after-hours trading Thursday. That's the lowest Fortinet's stock has traded since May 4.
The Americas accounted for 41.5% of Fortinet's revenue in the fourth quarter, while Europe, the Middle East and Africa, or EMEA, delivered 39.2% of revenue and Asia-Pacific, or APAC, was responsible for the remaining 19.3% of revenue.
For the quarter ending Sept. 30, Fortinet expects diluted non-GAAP net income of $0.35 to $0.37 per share on revenue of between $1.315 billion and $1.375 billion. Analysts had been expecting sales of $1.38 billion, according to Seeking Alpha.