Summary
Fortinet's first quarter of fiscal 2023 showed broad growth across the income statement. Revenue rose 32.2% year over year to $1.26 billion. Gross profit rose 36.2% to $954.5 million, and gross margin expanded 2.2 percentage points to 75.6%. Operating income rose 81.1% to $273.5 million, lifting operating margin by 5.9 percentage points to 21.7%. Net income rose 79.0% to $247.7 million. Diluted EPS was $0.31, up from $0.17. On a non-GAAP basis, operating income was $334.0 million, operating margin was 26.5%, and diluted EPS was $0.34. Non-GAAP net income was $269.7 million.
Cash generation remained a highlight. Operating cash flow rose 71.0% to $677.5 million. Capital expenditures fell 75.3% to $30.3 million. Free cash flow, a non-GAAP measure, was $647.2 million. Billings, also non-GAAP, were $1.50 billion, up 29.6%. Deferred revenue, current portion, rose 30.1% to $2.46 billion. Remaining performance obligations rose 34.2% to $4.91 billion. Management said growth reflected an elevated cyber threat landscape, the convergence of security and networking, pricing actions, improving supply chain dynamics, and changes in backlog. The company added headcount, ending the quarter with 13,202 employees and contractors, a 5% increase from 12,595 as of December 31, 2022. Days sales outstanding increased to 78 days from 75 days. Billings were geographically diversified, with about 50% coming from over 100 countries that each contributed less than 3%. Fortinet said it held 1,285 U.S. and foreign-issued patents as of March 31, 2023, and over half a million customers trusted its solutions.
Guidance points to continued growth but at a moderating pace. For the second quarter of 2023, Fortinet expects revenue of $1.280 billion to $1.320 billion and billings of $1.560 billion to $1.600 billion. It guided non-GAAP gross margin to 75.5% to 76.5%, non-GAAP operating margin to 24.5% to 25.5%, and non-GAAP diluted EPS to $0.33 to $0.35, assuming a 17% non-GAAP effective tax rate and a diluted share count of 790 million to 800 million. For the full fiscal year 2023, the company expects revenue of $5.425 billion to $5.485 billion and billings of $6.750 billion to $6.810 billion. Full-year non-GAAP gross margin is guided to 75.0% to 76.0%, non-GAAP operating margin to 25.0% to 26.0%, and non-GAAP diluted EPS to $1.44 to $1.48, assuming a 17% non-GAAP effective tax rate and a diluted share count of 795 million to 805 million. In April 2023, the board authorized a $1.0 billion increase to the share repurchase program, leaving approximately $1.53 billion available as of May 4, 2023. The company said it has not reconciled its non-GAAP guidance to GAAP because certain items are uncertain or out of its control.
Risks remain substantial. Management flagged worsening economic conditions, inflation, higher interest rates, slower growth, a possible recession, foreign exchange fluctuations, and instability in the global banking system. Supply chain challenges, component shortages, increased costs, and inventory management could still pressure results. The company also cited longer sales cycles, competition, pricing pressure, cybersecurity threats, litigation, and geopolitical risks including the war in Ukraine and tensions between China and Taiwan. Fortinet expects capital expenditures of $400 million to $450 million in 2023. Purchase commitments were $1.20 billion as of March 31, 2023, down $133.0 million from $1.34 billion as of December 31, 2022. Operating expenses as a percentage of revenue decreased 3.7 percentage points year over year, helped by foreign currency fluctuations, but management expects operating expenses to increase in absolute dollars during the remainder of 2023.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q1 FY2023 | Q4 FY2022 | QoQ | Q1 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $1.26B | $1.28B | -1.6% | $954.8M | +32.2% |
| Gross profit | $954.5M | $985.7M | -3.2% | $701.0M | +36.2% |
| Gross margin | 75.6% | 76.8% | -1.2 pp | 73.4% | +2.2 pp |
| Research & development | $151.1M | $128.9M | +17.2% | $124.9M | +21.0% |
| Sales & marketing | $478.3M | $455.9M | +4.9% | $387.6M | +23.4% |
| General & administrative | $52.8M | $44.3M | +19.2% | $38.6M | +36.8% |
| Total operating expenses | $681.0M | $627.9M | +8.5% | $550.0M | +23.8% |
| Operating income (loss) | $273.5M | $357.8M | -23.6% | $151.0M | +81.1% |
| Operating margin | 21.7% | 27.9% | -6.2 pp | 15.8% | +5.9 pp |
| Net income (loss) | $247.7M | $313.8M | -21.1% | $138.4M | +79.0% |
| Net margin | 19.6% | 24.5% | -4.8 pp | 14.5% | +5.1 pp |
| Diluted EPS | $0.31 | $0.39 | -$0.08 | $0.84 | -$0.53 |
Risks
MD&A and risk factors highlight worsening economic conditions, including inflation, higher interest rates, slower growth, any recession, and instability in the global banking system, such as the March 2023 SVB receivership, which may decrease sales productivity and growth and adversely affect results.
The filing states Fortinet continues to experience ongoing product and component shortages, with certain contract manufacturers and component suppliers de-committing from scheduled delivery dates, and increased component costs have negatively impacted gross margins. MD&A notes supply chain challenges, increased supplier commitments, and insufficient inventory to promptly meet all demand.
Substantially all revenue is from channel partners, and six distributor customers accounted for 66% of total net accounts receivable in the aggregate as of March 31, 2023, with one distributor at 28%. MD&A also notes days sales outstanding increased to 78 days in Q1 2023 from 75 days in the same period last year and the accounts receivable allowance for credit losses increased to $6.7 million as of March 31, 2023 from $3.6 million as of December 31, 2022.
Growth strategy depends on increasing sales to large and medium-sized businesses, service providers, and government organizations, where sales cycles can exceed 12 months, involve longer implementation cycles, and face uneven traction. The filing says current economic conditions and government regulations are further extending some sales cycles.
The market for network security is intensely competitive, with competitors including Cisco, Palo Alto Networks, CrowdStrike, and Zscaler. The filing notes larger competitors have broader product offerings and may bundle competing products, and customers may consolidate vendors or choose cloud-based security services, pressuring prices, revenue, and gross margins.
Fortinet increased purchase order commitments in response to component shortages, and suppliers may require it to accept or pay for components and finished goods regardless of sales. Purchase commitments totaled $1.20 billion as of March 31, 2023, a decrease of $133.0 million compared to $1.34 billion as of December 31, 2022, but excess inventory could require discounts or write-downs and lower gross margins.
Future success depends on attracting and retaining highly skilled personnel, especially sales, support, and engineering employees in the San Francisco Bay Area and Vancouver. The filing says competition is intense, and in light of macroeconomic trends Fortinet may face excess sales capacity and a decline in sales productivity if it cannot align capacity with market demand.
A majority of revenue is from sales outside the United States, exposing Fortinet to risks including the war in Ukraine, tensions between China and Taiwan, trade restrictions, tariffs, and foreign currency fluctuations. The filing notes these factors could disrupt sales, shipping, and support in certain regions.
Sales to government organizations require certain security and other certifications that may be costly and time-consuming, and failure to obtain or maintain them could restrict sales. The filing also cites government audits, trade protectionism, and geopolitical matters as risks to public sector demand.
Fortinet may expand data centers and office buildings, and construction projects expose it to delays, budget changes, increased prices for building supplies and data center equipment, labor availability, and power access issues. MD&A estimates capital expenditures of $400 million to $450 million in 2023.
Fortinet has ongoing tax audits in the United Kingdom, Canada, Germany, and several other foreign jurisdictions focused on allocation of profits among legal entities. OECD tax proposals and changes in tax laws could increase its worldwide effective tax rate.
As of March 31, 2023, Fortinet had $990.9 million of indebtedness outstanding under senior notes, with covenants and potential repurchase obligations upon certain changes of control. This debt may reduce flexibility and require cash flow dedicated to servicing obligations.
SaaS KPIs
All quarters →Billings
Free Cash Flow
Non-GAAP Operating Margin
Deferred Revenue
Summary, forecast, risks and KPIs are extracted from Fortinet, Inc.'s SEC filings for Q1 FY2023 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 1, 2026.