Summary
Fortinet's second quarter of fiscal 2024 showed a widening split between revenue growth and profitability. Total revenue was $1.43 billion, up 10.9% from the prior-year quarter. Gross profit rose to $1.16 billion, up 16.3%, and gross margin reached 80.8%, up 3.7 percentage points. Operating income was $437.2 million, up 56.7%, and operating margin was 30.5%, up 8.9 percentage points. Net income was $379.8 million, up 42.6%, and diluted EPS was $0.49, up 48.5%. The company also reported a record non-GAAP operating margin of 35.1%, up 820 basis points year over year. Management said the quarter balanced growth and profitability. The company said it is the only vendor in the Gartner Magic Quadrant for Single-Vendor SASE that is also recognized in five different network security Magic Quadrant reports.
Cash generation was weaker. Operating cash flow was $342.0 million, down 33.6% from the prior-year quarter. Capital expenditures were $23.1 million, down 69.9%. Free cash flow, a non-GAAP measure, was $318.9 million, compared with $438.3 million in the prior-year quarter. Short-term deferred revenue was $2.98 billion, up 15.0% from the prior-year quarter. Remaining performance obligations were $5.92 billion, up 15.0%. Total billings were $1.54 billion, flat compared with the prior-year quarter. The company said billings and revenue were at the high end of their respective guidance ranges.
For the first six months of fiscal 2024, total revenue was $2.79 billion, up 9.1% from the prior-year period. Gross profit was $2.21 billion, up 13.1%, and gross margin was 79.2%, up 2.8 percentage points. Operating income was $758.4 million, up 37.3%, and operating margin was 27.2%, up 5.6 percentage points. Net income was $679.1 million, up 32.1%, and diluted EPS was $0.88, up 35.4%. Operating cash flow was $1.17 billion, down 1.7%. Capital expenditures were $245.0 million, up 128.8%. The company said service revenue growth was driven by security subscription revenue. The company noted that revenue was diversified globally, with all regions growing.
Management guided for the third quarter of 2024 with billings of $1.530 billion to $1.600 billion, non-GAAP gross margin of 79.0% to 80.0%, non-GAAP operating margin of 30.5% to 31.5%, and diluted non-GAAP net income per share of $0.56 to $0.58. For the full fiscal year 2024, management guided for billings of $6.400 billion to $6.600 billion, non-GAAP gross margin of 79.0% to 80.0%, non-GAAP operating margin of 30.0% to 31.5%, and diluted non-GAAP net income per share of $2.13 to $2.19. The company said it continues to invest in Unified SASE and Security Operations while gaining share in Secure Networking.
The quarter also carried clear risks. Management pointed to macroeconomic conditions, longer sales cycles, delayed purchases, and geopolitical conflicts including the war in Ukraine and the Israel-Hamas war. Product revenue pressure remains a theme, with management expecting product revenue growth rates to be affected by backlog drawdown and pricing actions for the remainder of 2024. Service revenue growth rates are expected to ease. The company also noted supply chain challenges, inventory obsolescence risk, and competition in the security market. Operating expenses are expected to increase in absolute dollars year over year during the remainder of 2024. The company said worsening economic conditions could have a material negative impact on future results, including billings, revenue, and costs. Headcount was 13,527 employees and contractors as of June 30, 2024, comparatively flat compared to 13,568 as of December 31, 2023.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2024 | Q1 FY2024 | QoQ | Q2 FY2023 | YoY |
|---|---|---|---|---|---|
| Revenue | $1.43B | $1.35B | +6.0% | $1.29B | +10.9% |
| Gross profit | $1.16B | $1.05B | +10.6% | $997.0M | +16.3% |
| Gross margin | 80.8% | 77.5% | +3.3 pp | 77.1% | +3.7 pp |
| Research & development | $165.4M | $173.0M | -4.4% | $153.3M | +7.9% |
| Sales & marketing | $501.3M | $501.1M | +0.0% | $515.9M | -2.8% |
| General & administrative | $56.6M | $54.4M | +4.0% | $49.9M | +13.4% |
| Total operating expenses | $722.1M | $727.4M | -0.7% | $718.0M | +0.6% |
| Operating income (loss) | $437.2M | $321.2M | +36.1% | $279.0M | +56.7% |
| Operating margin | 30.5% | 23.7% | +6.8 pp | 21.6% | +8.9 pp |
| Net income (loss) | $379.8M | $299.3M | +26.9% | $266.3M | +42.6% |
| Net margin | 26.5% | 22.1% | +4.4 pp | 20.6% | +5.9 pp |
| Diluted EPS | $0.49 | $0.39 | +$0.10 | $0.33 | +$0.16 |
Risks
Worsening economic conditions, including inflation, higher interest rates, recession risk, and geopolitical conflicts such as the war in Ukraine and the Israel-Hamas war, may cause longer sales cycles, delayed purchases, and reduced IT spending. MD&A states the company has already seen longer sales cycles, delayed purchases, and increased supplier commitments and inventory reserves.
Product revenue decreased 4% in the quarter and 12% year to date, driven by lower hardware revenue, backlog drawdown, reduced net prices on certain products, and macroeconomic conditions. MD&A expects product revenue growth rates to continue to be impacted by backlog drawdown and earlier pricing actions for the remainder of 2024.
Total billings were $1.54 billion for the quarter, flat compared to the same period last year, while revenue grew 11%. The company notes billings drive current and future revenue and that backlog fluctuations and supply chain normalization can lower product revenue growth versus prior quarters.
Six distributor customers accounted for 68% of total net accounts receivable in the aggregate as of June 30, 2024, and one distributor accounted for 30% of total net accounts receivable. Dependence on a limited number of channel partners exposes Fortinet to credit and liquidity risk if those partners cannot pay or reduce purchases.
Sales to large and medium-sized businesses, service providers, and government organizations involve longer sales cycles, in some cases longer than 12 months, and uneven traction with certain government organizations and service providers. MD&A notes sales and marketing expense decreased 3% in the quarter and headcount was comparatively flat, which may pressure sales execution and productivity.
The network security market is intensely competitive, with competitors including Cisco, Palo Alto Networks, CrowdStrike, and Zscaler, some of which focus on delivering security services from the cloud. Larger competitors have broader product offerings and can bundle products, potentially causing price reductions, fewer orders, and loss of market share.
Service revenue increased 20% in the quarter and 22% year to date, but MD&A expects service revenue growth rates to ease throughout the remainder of 2024 due to slowing deferred revenue and product revenue growth over the past several quarters, partially offset by increases in SaaS revenue.
Fortinet depends on senior management, particularly co-founders Ken Xie and Michael Xie, and experienced sales, support, and engineering personnel in competitive locations such as the San Francisco Bay Area and Vancouver. The company notes its Chief Revenue Officer announced retirement in December 2023 and that turnover in management-level personnel occurs from time to time.
Expansion of data centers, points of presence, office buildings, and warehouses exposes Fortinet to construction delays, increased prices for building supplies and data center equipment, permitting delays, power access issues, and labor disputes. MD&A estimates capital expenditures of $75.0 million to $115.0 million in the second half of 2024, after capital expenditures increased 128.8% year to date.
Managing inventory is complex amid supply chain disruption, with risks of component shortages, excess inventory, and write-offs. Inventory purchase commitments totaled $566.7 million as of June 30, 2024, a decrease of $70.6 million from December 31, 2023, while the liability for purchase commitments in excess of demand forecasts was $105.2 million.
The effective tax rate increased to 16% for the quarter from 9% in the prior-year quarter, and to 14% year to date from 8%. Fortinet has ongoing tax audits in the United Kingdom, Canada, and several other foreign jurisdictions focused on allocation of profits among legal entities, and OECD tax proposals may increase worldwide effective tax rate.
Sales to government organizations require certain security and other certifications, such as FedRAMP, and are subject to public sector budget cycles, audits, and trade restrictions. Failure to obtain or maintain certifications may restrict sales to government customers and cause reputational harm with other agencies and businesses.
As of June 30, 2024, Fortinet had $993.3 million of indebtedness outstanding under its Senior Notes, with covenants and change-of-control repurchase provisions. The debt may reduce cash flow available for capital expenditures, share repurchases, and acquisitions, and a breach of covenants could accelerate repayment.
Loss from equity method investments increased $6.7 million in the quarter compared to the prior-year quarter, primarily driven by an $8.0 million other-than-temporary impairment charge recorded during the quarter. Equity investments can create volatility in financial results.
SaaS KPIs
All quarters →Billings
Free Cash Flow
Non-GAAP Operating Margin
Deferred Revenue
Non-GAAP Operating Income
Summary, forecast, risks and KPIs are extracted from Fortinet, Inc.'s SEC filings for Q2 FY2024 (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.