Summary
Fortinet reported fourth-quarter revenue of $1.28 billion, up 33.1% from the prior-year quarter. Billings reached $1.72 billion, up 31.6%. For the full year, revenue was $4.42 billion, up 32.2%, and billings were $5.59 billion, up 33.8%. Product revenue grew faster than service revenue, according to the press release, with management pointing to an elevated threat landscape, the convergence of security and networking, pricing actions, and demand for Enhanced Platform Technology products, secure access, and software licenses. Service growth came from FortiGuard security subscriptions and FortiCare support.
Profitability improved on a GAAP basis. Fourth-quarter gross profit was $985.7 million, up 34.1%, and gross margin was 76.8%, up 0.5 percentage points. Operating income was $357.8 million, up 66.5%, and operating margin was 27.9%, up 5.6 percentage points. Net income was $313.8 million, up 57.7%. For the full year, GAAP diluted EPS was $1.06, up 45.2%. Non-GAAP operating income was $417.6 million, up 52%, with a non-GAAP operating margin of 32.5%. Non-GAAP net income was $349.7 million, and non-GAAP diluted EPS was $0.44, up 76%. Full-year non-GAAP operating income was $1.21 billion, up 38%, and full-year non-GAAP diluted EPS was $1.19, up 49%.
Cash generation remained strong. Fourth-quarter operating cash flow was $528.1 million, up 44.0% from the prior-year quarter. Free cash flow was $497.2 million. For the full year, operating cash flow was $1.73 billion, up 15.4%, and free cash flow was $1.45 billion. Capital expenditures were $281.2 million for the full year, down 5.0%. Short-term deferred revenue was $2.35 billion, up 32.2%, and remaining performance obligations were $4.65 billion, up 34.8%. The company repurchased $1.99 billion of stock during 2022. Headcount rose 24% to 12,595 employees, and days sales outstanding increased to 89 days from 75 days. Inventory purchase commitments were $1.34 billion as of December 31, 2022.
Guidance points to continued growth but slower than the fourth quarter. For the first quarter of 2023, Fortinet expects revenue of $1.180 billion to $1.220 billion, billings of $1.415 billion to $1.465 billion, a non-GAAP gross margin of 75.0% to 76.0%, a non-GAAP operating margin of 23.0% to 24.0%, and non-GAAP diluted EPS of $0.27 to $0.29. For the full year 2023, the company guides revenue of $5.370 billion to $5.430 billion, service revenue of $3.335 billion to $3.365 billion, billings of $6.710 billion to $6.790 billion, a non-GAAP gross margin of 75.0% to 76.0%, a non-GAAP operating margin of 25.0% to 26.0%, and non-GAAP diluted EPS of $1.39 to $1.41. The company also estimates 2023 capital expenditures of $400.0 million to $450.0 million. Management expects operating expenses to increase in absolute dollars in 2023, and gross margin will depend on product and service mix.
Risks remain tied to the macro environment and execution. Management cites supply chain constraints, chip and component shortages, higher component and shipping costs, and insufficient inventory to meet all demand. Inflation, higher interest rates, slower growth, foreign exchange fluctuations, the COVID-19 pandemic, and the war in Ukraine could pressure results. Competition, pricing pressure, longer sales cycles, and execution around new products and acquisitions are also named risks. The company's equity method investment in Linksys remains a drag, and the company recorded a non-cash charge on that investment. Operating expenses are expected to increase in absolute dollars in 2023, and gross margin will depend on product and service mix. The company also faces risks from tariffs, trade disputes, cybersecurity threats, litigation, and government regulation.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q4 FY2022 | Q3 FY2022 | QoQ | Q4 FY2021 | YoY |
|---|---|---|---|---|---|
| Revenue | $1.28B | $1.15B | +11.6% | $963.6M | +33.1% |
| Gross profit | $985.7M | $866.5M | +13.8% | $735.3M | +34.1% |
| Gross margin | 76.8% | 75.4% | +1.5 pp | 76.3% | +0.5 pp |
| Research & development | $128.9M | $134.3M | -4.0% | $112.6M | +14.5% |
| Sales & marketing | $455.9M | $427.1M | +6.7% | $367.7M | +24.0% |
| General & administrative | $44.3M | $40.7M | +8.8% | $41.3M | +7.3% |
| Total operating expenses | $627.9M | $601.0M | +4.5% | $520.4M | +20.7% |
| Operating income (loss) | $357.8M | $265.5M | +34.8% | $214.9M | +66.5% |
| Operating margin | 27.9% | 23.1% | +4.8 pp | 22.3% | +5.6 pp |
| Net income (loss) | $313.8M | $231.1M | +35.8% | $198.9M | +57.8% |
| Net margin | 24.5% | 20.1% | +4.4 pp | 20.6% | +3.8 pp |
| Diluted EPS | $0.39 | $0.29 | +$0.10 | $1.19 | -$0.80 |
Risks
Risk factors and MD&A highlight worsening economic conditions, including inflation or possible stagflation, rising interest rates, recession risk and reduced information technology spending. The filing states these could lead to longer sales cycles, lower prices, increased component costs, higher default rates among channel partners, reduced unit sales and slower or declining growth.
Fortinet continues to experience ongoing product and component shortages, extended lead times, de-committed delivery dates from suppliers and increased component costs. MD&A notes continued supply chain challenges, insufficient inventory to promptly meet all demand, increased supplier commitments and a transition primarily to air shipping.
Substantially all revenue is generated through channel partners, and a small number of distributors represents a large percentage of revenue and gross accounts receivable. One distributor accounted for 32% of total net accounts receivable as of December 31, 2022, and six distributor customers accounted for 69% of total net accounts receivable in the aggregate as of December 31, 2022.
Growth strategy depends on increasing sales to large and medium-sized end-customers, service providers and government organizations, which involves longer and more complex sales cycles and unpredictability in timing of larger enterprise deals. The filing notes risk that sales representatives do not effectively sell Enhanced Platform Technology products and that sales cycles can exceed 12 months.
International sales are a majority of total revenue, with the Americas, EMEA and APAC regions contributing 41%, 38% and 21% of total revenue in 2022, respectively. Risks include the war in Ukraine, China-Taiwan tensions, tariffs, export controls, foreign currency fluctuations and political instability that could disrupt sales or supply chains.
Total gross margin for FY2022 year to date was 75.4%, down 1.1 percentage points from FY2021 year to date, according to reported figures. The decline was driven by revenue mix shifting to lower margin product revenue from higher margin service revenue and Alaxala consolidation, which could pressure operating margins and free cash flow if it continues.
Loss from equity method investment increased by $60.5 million in 2022 compared to 2021, driven by a $38.3 million increase in the proportionate share of Linksys financial results plus basis difference amortization, a $17.5 million valuation allowance charge on deferred tax assets at Linksys, and a $22.2 million other-than-temporary impairment charge recorded in the three months ended December 31, 2022.
As of December 31, 2022, Fortinet had $990.4 million of indebtedness outstanding under senior notes, and interest expense increased 21% in 2022 compared to 2021. The agreements impose restrictive covenants and any breach could cause outstanding indebtedness to become immediately due and payable.
The provision for income taxes for 2022 reflects an effective tax rate of 3% compared to 2% for 2021. The company has ongoing tax audits in the United Kingdom, Canada, Germany and several other foreign jurisdictions focused on allocation of profits, and OECD tax proposals could increase its worldwide effective tax rate.
Future performance depends on senior management, particularly co-founders Ken Xie and Michael Xie, and on hiring and retaining skilled sales, support and engineering personnel. Competition is intense in the San Francisco Bay Area and Vancouver, and return-to-office plans may be viewed negatively by employees and lead to attrition and difficulty hiring.
A substantial portion of each quarter's sales orders, billings and revenue is generated during the last two weeks of the quarter, and a delay in logistics, power outage, system issue or trade compliance delay could prevent shipping and billing a material amount of products. MD&A notes majority of product revenue usually occurs in the final month of each quarter and a significant amount in the last two weeks.
A portion of revenue comes from sales to U.S. and foreign government organizations, which require costly third-party security certifications, involve public sector budgetary cycles, funding delays and geopolitical trade disputes. Failure to maintain permits, clearances or certifications could harm sales to these customers.
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 Q4 FY2022 (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 2, 2026.