Sign in

    Fortinet Inc (FTNT)

    Q4 2023 Summary

    Published Jan 10, 2025, 5:10 PM UTC
    Initial Price$58.79October 1, 2023
    Final Price$58.53December 31, 2023
    Price Change$-0.26
    % Change-0.44%

    What went well

    • FTNT demonstrated strong Q4 performance with billings exceeding expectations, driven by securing six 8-figure deals, showcasing their ability to win large enterprise contracts and capture market share.
    • Growth in the SASE and SecOps segments is outpacing the company average, reflecting successful expansion into high-growth markets beyond traditional firewall business, positioning FTNT for future growth.
    • The increasing network traffic due to emerging technologies like generative AI is expected to incentivize more firewall refreshes, and FTNT is well-positioned to capitalize on this trend, indicating potential for long-term growth.

    What went wrong

    • Increased capital expenditures could pressure free cash flow margins. CapEx is increasing materially in the coming year, which may impact free cash flow, despite management's optimism about offsetting factors.
    • Challenging billings and product revenue growth in early 2024. The company expects the first quarter of 2024 to be among the most challenging on the billings and product revenue lines, with guidance indicating a billings decline of 5.5%. The strong Q4 2023 performance, boosted by six 8-figure deals, may not be repeated in subsequent quarters.
    • Dependence on existing customers for growth. New customer acquisition represents less than 10% of the business, indicating limited growth potential from new customers and a reliance on the existing customer base for expansion, especially in SASE and SecOps segments.

    Q&A Summary

    1. Billings Growth and Outlook
      Q: How should we think about billings growth in 2024?
      A: Billings growth is expected to improve quarterly throughout 2024 as backlog headwinds diminish in the first half of the year. Despite a strong Q4 2023 making Q4 2024 comparisons tougher, management anticipates the sales team will perform well. The firewall market is currently flat but is expected to grow around 10% year-over-year over the next 3 to 5 years. SASE and SecOps are growing faster than the company average and are expected to continue this trend in the coming quarters. ,

    2. CapEx Increase and Free Cash Flow
      Q: What's driving CapEx increase and impact on free cash flow?
      A: CapEx is increasing due to investments in engineering facilities, labs, and hosted solutions to support future growth, especially in services like SASE. The company favors long-term real estate investments with attractive ROI over time. While they don't guide to free cash flow, management believes that 2024 free cash flow is in line with market expectations, considering operating profits and billings growth will offset CapEx increases, which are similar to 2023 levels. ,

    3. SASE and SecOps Growth and Strategy
      Q: How is SASE and SecOps performance and strategy evolving?
      A: SASE and SecOps are seeing strong growth, each around 40%, with SecOps slightly ahead this quarter. The pipeline for SASE grew by 150%, and the company closed its first 8-figure SASE deal. Focus has shifted to these areas, with 90% of the sales force trained and certified in SASE and SecureOps. The integrated, single OS-based SASE solution leveraging SD-WAN deployments is a competitive advantage. ,

    4. Impact of Generative AI on Firewall Market
      Q: Will generative AI drive firewall refresh demand?
      A: Yes, in the long term, generative AI is expected to significantly increase network traffic and security operations, leading to more firewall refreshes. Increased connectivity, more remote work, and AI-generated data needing security present good potential for long-term growth in the firewall market. ,

    5. Managing Profitability Amid Revenue Volatility
      Q: How are you managing profitability despite revenue volatility?
      A: Profitability is maintained due to the high-margin services business, which constitutes two-thirds of the business and provides rich margins even during firewall refresh cycles. Significant economies of scale in services like support and security subscriptions help margins hold up nicely. Additionally, the breadth of SecOps and SASE solutions spreads incremental hosting costs. Large, unpredictable deals are set aside in forecasts to avoid overestimation. ,

    6. SASE Dynamics in SMB vs. Enterprise
      Q: What's the SASE adoption in SMB versus enterprise?
      A: SASE is attractive to SMBs due to its OpEx consumption model, lowering management and personnel costs. Fortinet's strength in SMBs, with a large customer base and integrated solutions, positions it well. The success with large enterprises, including customers spending 8 figures, also boosts confidence across all market segments. ,

    7. Sales Productivity and Compensation
      Q: How are sales productivity and compensation expected to change?
      A: Sales productivity leveled off exiting 2023 and is expected to remain similar in 2024. While quotas may be lower due to 2023 results, investment in sales teams continues. There are no significant changes to compensation plans, but salespeople are incentivized to sell across all three solutions—secure networking, SASE, and SecOps—for higher compensation. ,

    Related Publications