Summary
Fortinet's fiscal third quarter results landed with strong top-line growth and solid profitability. Total revenue was $867.2 million, up 33.2% from the prior-year quarter. Gross profit was $656.0 million, up 28.2%. Operating income was $166.4 million, up 31.1%. Net income was $163.1 million, up 32.2%. Diluted EPS was $0.97, up 29.3%. Gross margin was 75.6%, down 3.0 percentage points. Operating margin was 19.2%, down 0.3 percentage points. On a year-to-date basis, revenue was $2.38 billion, up 28.8%. Gross profit was $1.82 billion, up 26.4%. Operating income was $435.5 million, up 20.2%. Net income was $407.8 million, up 19.3%. Diluted EPS was $2.44, up 20.2%. Year-to-date gross margin was 76.7%, down 1.5 percentage points, and year-to-date operating margin was 18.3%, down 1.3 percentage points.
Billings, a non-GAAP metric, crossed $1 billion for the first time and reached $1.06 billion, up 42% from the prior-year quarter. Current deferred revenue was $1.62 billion, up 24.3% from a year earlier. Remaining performance obligations were $3.11 billion, up 30.1%. Operating cash flow was $398.8 million for the quarter, up 80.6%, and $1.13 billion for the nine months, up 43.9%. Capital expenditures were $69.0 million for the quarter, up 96.6%, and $144.6 million for the nine months, up 54.5%. Free cash flow, a non-GAAP measure, was $329.8 million. Non-GAAP operating income was $223.6 million, and non-GAAP operating margin was 25.8%. Non-GAAP net income was $165.9 million, and non-GAAP diluted EPS was $0.99. The company ended the quarter with 9,700 employees and contractors, an 18% increase from 8,238 at December 31, 2020. Product revenue growth was consistent with an elevated cyber threat landscape. FortiGate products accounted for more than half of product revenue growth. Secure SD-WAN contributed, but the main driver was demand for other operating system capabilities embedded in FortiGate products.
Management issued guidance for the fourth quarter of 2021. Revenue is expected in the range of $940 million to $970 million. Billings are expected in the range of $1.165 billion to $1.215 billion. Non-GAAP gross margin is expected in the range of 75.0% to 76.0%. Non-GAAP operating margin is expected in the range of 27.0% to 28.0%. Diluted non-GAAP EPS is expected in the range of $1.10 to $1.15, assuming a non-GAAP effective tax rate of 21% and a diluted share count of 168 million to 170 million. For the full fiscal year 2021, the company guided revenue to $3.320 billion to $3.350 billion, service revenue to $2.080 billion to $2.090 billion, billings to $4.040 billion to $4.090 billion, non-GAAP gross margin to 76.5% to 77.5%, non-GAAP operating margin to 25.5% to 26.5%, and diluted non-GAAP EPS to $3.85 to $3.95. The full-year non-GAAP EPS guidance assumes a non-GAAP effective tax rate of 21% and a diluted share count of 167 million to 169 million. These non-GAAP guidance figures exclude stock-based compensation, amortization of acquired intangible assets and a gain on an intellectual property matter. The company has not reconciled its non-GAAP guidance to GAAP because certain items are uncertain or out of its control.
The quarter came with familiar execution risks. Supply chain constraints and chip and component shortages are pressuring manufacturing and delivery, and the company said it does not have enough inventory to promptly meet all demand for all products. Increased costs for certain chips, other components and shipping are part of the picture. COVID-19 variants and return-to-office plans add uncertainty, and sales cycles have varied. Competition in the security market remains intense. The company closed its acquisition of 75% of AlaxalA Networks Corporation on August 31, 2021, which adds integration risk. In October 2021, the board authorized a $1.25 billion increase to the share repurchase program and extended it to February 28, 2023. As of November 1, 2021, roughly $2 billion remained available for future repurchases. During the nine months ended September 30, 2021, the company repurchased 0.8 million shares for $200.4 million. The company issued $1.0 billion in senior notes in March 2021. Purchase commitments totaled $868.0 million as of September 30, 2021. Full year capital expenditures are estimated between $315.0 million and $335.0 million. The company also sponsored the Fortinet Championship, a PGA tour event, in September 2021, which contributed to marketing expense.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2021 | Q2 FY2021 | QoQ | Q3 FY2020 | YoY |
|---|---|---|---|---|---|
| Revenue | $867.2M | $801.1M | +8.3% | $651.1M | +33.2% |
| Gross profit | $656.0M | $614.2M | +6.8% | $511.9M | +28.2% |
| Gross margin | 75.7% | 76.7% | -1.0 pp | 78.6% | -3.0 pp |
| Research & development | $107.8M | $106.6M | +1.1% | $90.0M | +19.8% |
| Sales & marketing | $347.1M | $326.9M | +6.2% | $266.7M | +30.1% |
| General & administrative | $35.8M | $34.4M | +4.1% | $29.4M | +21.8% |
| Total operating expenses | $489.6M | $466.7M | +4.9% | $385.0M | +27.2% |
| Operating income (loss) | $166.4M | $147.5M | +12.8% | $126.9M | +31.1% |
| Operating margin | 19.2% | 18.4% | +0.8 pp | 19.5% | -0.3 pp |
| Net income (loss) | $163.1M | $137.5M | +18.6% | $123.4M | +32.2% |
| Net margin | 18.8% | 17.2% | +1.6 pp | 18.9% | -0.1 pp |
| Diluted EPS | $0.97 | $0.82 | +$0.15 | $0.75 | +$0.22 |
Risks
Fortinet is experiencing ongoing chip and other component shortages, extended lead times, increased component and shipping costs, and does not have enough inventory to promptly meet all demand, which may delay billings and revenue and pressure gross margins.
COVID-19, including the Delta variant and other variants, continues to disrupt global supply chains and demand, and management says the pandemic may have a material negative impact on future periods, including billings and product revenue.
Substantially all revenue comes through third-party channel partners, and Exclusive alone accounted for 31% and 32% of total revenue during the three and nine months ended September 30, 2021, while six distributor customers were 67% of total net accounts receivable at that date.
Reliance on a concentration of shipments at the end of the quarter could cause billings and revenue to fall below expected levels if logistics, order processing or system issues delay quarter-end shipments.
Fortinet depends on Ken Xie, Michael Xie and other senior leaders, and faces intense competition for sales, support and engineering personnel, while the return-to-office transition may lead to attrition or difficulty hiring.
The network security market is intensely competitive, with larger competitors such as Cisco and Palo Alto Networks and cloud-focused competitors such as Zscaler that may have greater resources, broader distribution or cloud delivery models.
Total gross margin decreased by 3.0 percentage points during the three months ended September 30, 2021 compared to the same period last year, with product gross margin down 2.1 points on AlaxalA consolidation, higher supply-chain product costs and product mix, and service gross margin down 1.7 points.
Growth strategy depends on increasing sales to large and medium-sized end-customers, service providers and government organizations, but these sales involve longer sales cycles, uneven traction selling to government organizations and service providers or MSSPs, and deals that can take longer than 12 months.
A majority of revenue is generated outside the United States, exposing Fortinet to geopolitical instability, trade disputes, tariffs and foreign regulatory compliance risks; revenue from China has been less than 1% of aggregate revenue, possibly due in part to a preference for Chinese businesses.
As of September 30, 2021, Fortinet had $988.0 million of senior notes outstanding, which adds interest expense, restrictive covenants, refinancing risk and change-of-control repurchase obligations.
Fortinet has ongoing tax audits in the United Kingdom, Canada, Germany and several other foreign jurisdictions focused on allocation of profits among legal entities, and proposed U.S. corporate rate increases or OECD changes could raise the worldwide effective tax rate.
In October 2021 the board approved a $1.25 billion increase to the Repurchase Program, extending it to February 28, 2023 and bringing aggregate authorization to $4.25 billion; repurchases could increase stock volatility, diminish cash reserves or occur at non-optimal prices.
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 Q3 FY2021 (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.