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Fortinet, Inc. 10-K Analysis & Summary – 2/21/2025

⚠️This is not investment advice.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️

Fortinet, Inc.

Filing date:

02/21/2025

TLDR:

Fortinet’s 10-K filing for 2024 shows revenue growth driven by services and improved profitability. However, product revenue growth has slowed, and operating expenses are expected to increase.

ELI5:

Fortinet, a cybersecurity company, made more money in 2024, mostly from its services. But, sales of its products slowed down, and they expect to spend more money in the future.

Accession #:

0001262039-25-000011

Published on

Analyst Summary

  • Total Revenue: $5.96 billion (up 12% YoY)
  • Product Revenue: $1.91 billion (down 1% YoY)
  • Service Revenue: $4.05 billion (up 20% YoY)
  • Gross Margin: 80.6% (up 3.9 percentage points YoY)
  • Operating Income: $1.80 billion (up 45% YoY)
  • Operating Margin: 30.3% (up 6.9 percentage points YoY)
  • Net Income: $1.75 billion
  • Cash, Cash Equivalents, and Investments: $4.07 billion (up 67% YoY)
  • Deferred Revenue: $6.36 billion (up 11% YoY)
  • Cash Flow from Operations: $2.26 billion (up 17% YoY)
  • Free Cash Flow: $1.88 billion (up 8.5% YoY)
  • Billings (Non-GAAP): $6.53 billion (up 2% YoY)
  • Headcount: 14,138 (up 4% YoY)
  • Gross Profit Margin increased from 76.7% to 80.6%, a 5.1% increase.
  • Operating Profit Margin increased from 23.4% to 30.3%, a 29.5% increase.
  • Net Profit Margin increased from 21.6% to 29.3%, a 35.6% increase.
  • ROA increased from 15.8% to 17.9%, a 13.3% increase.
  • ROE increased from -247.7% to 116.8%.
  • Basic EPS increased from $1.47 to $2.28, a 55.1% increase.
  • Diluted EPS increased from $1.46 to $2.26, a 54.8% increase.
  • Current Ratio increased from 1.19 to 1.47, a 23.5% increase.
  • Quick Ratio increased from 1.06 to 1.39, a 31.1% increase.
  • Cash Ratio increased from 0.38 to 0.71, a 86.8% increase.
  • Debt-to-Equity Ratio increased from -2.14 to 0.666.
  • Debt-to-Assets Ratio decreased from 0.137 to 0.102, a -25.5% decrease.
  • Interest Coverage Ratio increased from 59.1 to 90.2, a 52.6% increase.
  • Inventory Turnover increased from 2.55 to 3.67, a 43.9% increase.
  • DSO decreased from 96.4 to 89.7, a -7% decrease.
  • DPO decreased from 60.3 to 60.1, a -0.3% decrease.
  • Asset Turnover decreased from 0.73 to 0.61, a -16.4% decrease.
  • P/E ratio increased from 2023 to 2024.
  • P/B ratio increased from 2023 to 2024.
  • P/S ratio increased from 2023 to 2024.
  • Revenue grew by 12.3% from 2023 to 2024.
  • Net Income grew by 52.1% from 2023 to 2024.
  • EPS grew by 55.1% from 2023 to 2024.
  • Billings increased from $6,399.5 million in 2023 to $6,532.5 million in 2024, a 2.1% increase.
  • Free cash flow increased from $1,731.4 million in 2023 to $1,879.2 million in 2024, an 8.5% increase.
  • Fortinet recorded a gain on bargain purchase of $106.3 million in 2024, compared to none in 2023.

Opportunities and Risks

  • Competition: Intense competition in the cybersecurity market could lead to price reductions and loss of market share.
  • Supply Chain: Continued supply chain disruptions could impact product availability and increase costs.
  • Economic Conditions: Adverse economic conditions, such as a recession or inflation, could reduce IT spending and negatively affect demand.
  • Product Vulnerabilities: Defects or vulnerabilities in products could damage the company’s reputation and lead to liability.
  • International Operations: Fluctuations in currency exchange rates and geopolitical instability could impact international sales and operations.
  • SASE and SecOps Growth: Expanding into the SASE and SecOps markets presents significant growth opportunities.
  • Vendor Consolidation: The trend towards vendor consolidation in cybersecurity could benefit Fortinet’s integrated platform approach.
  • Firewall Refresh Cycle: An anticipated firewall refresh cycle offers a strategic opportunity to expand market share.
  • AI Integration: Leveraging AI to enhance security operations and threat intelligence can provide a competitive advantage.

Potential Implications

Company Performance

  • Monitor Product Revenue: Closely track product revenue growth in 2025 to assess the effectiveness of strategies to address the slowdown.
  • Expense Management: Evaluate the company’s ability to manage operating expenses and maintain profitability despite increased investments.
  • Competitive Landscape: Continuously assess the competitive landscape and adapt strategies to maintain market share.
  • Supply Chain Resilience: Strengthen supply chain resilience to mitigate potential disruptions.

Fortinet, Inc. (FTNT) – SEC Filing Report (10-K) – December 31, 2024

Executive Summary

This report analyzes Fortinet’s 10-K filing for the year ended December 31, 2024. Key findings include revenue growth driven by services, a shift towards higher gross margins, and increased profitability. However, product revenue growth has slowed, and operating expenses are expected to increase in 2025. The company faces risks related to competition, supply chain disruptions, and global economic uncertainty. Overall, a cautious “Hold” rating is recommended, pending further observation of product revenue recovery and expense management in 2025.

Company Overview

Fortinet, Inc. is a global leader in cybersecurity solutions, focusing on the convergence of networking and security. Their integrated platform, the Fortinet Security Fabric, spans secure networking, unified SASE, and AI-driven security operations. The company serves a diverse customer base across various industries and geographies.

Detailed Analysis

Management’s Discussion and Analysis (MD&A)

Management highlights the company’s leadership in cybersecurity and the convergence of networking and security. They emphasize the Fortinet Security Fabric platform and its key components (FortiOS, FortiASIC, FortiCloud, FortiAI, FortiEndpoint, OT Security). The MD&A acknowledges potential risks, including economic conditions, supply chain constraints, and competition. A key takeaway is the expectation of increased operating expenses in 2025 due to investments in workforce, product development, and data center expansion.

Financial Statement Analysis

Income Statement

  • Total Revenue: $5.96 billion (up 12% YoY)
  • Product Revenue: $1.91 billion (down 1% YoY)
  • Service Revenue: $4.05 billion (up 20% YoY)
  • Gross Margin: 80.6% (up 3.9 percentage points YoY)
  • Operating Income: $1.80 billion (up 45% YoY)
  • Operating Margin: 30.3% (up 6.9 percentage points YoY)
  • Net Income: $1.75 billion

Key Ratios:

  • Gross Profit Margin: 80.6%
  • Operating Margin: 30.3%

Trends: Service revenue is driving overall growth, while product revenue is lagging. Gross margins are improving, but operating expenses are expected to increase in the future.

Balance Sheet

  • Cash, Cash Equivalents, and Investments: $4.07 billion (up 67% YoY)
  • Deferred Revenue: $6.36 billion (up 11% YoY)
  • Working Capital: $1.91 billion

Key Observations: Strong cash position and growing deferred revenue indicate financial stability. The increase in working capital suggests efficient management of current assets and liabilities.

Cash Flow Statement

  • Cash Flow from Operations: $2.26 billion (up 17% YoY)
  • Free Cash Flow: $1.88 billion (up 8.5% YoY)

Key Observations: Healthy cash flow generation supports investments and shareholder returns. Free cash flow growth is positive but slower than operating cash flow growth due to increased capital expenditures.

Uncommon Metrics

  • Billings (Non-GAAP): $6.53 billion (up 2% YoY) – Billings growth is slowing compared to revenue growth, indicating potential challenges in future revenue recognition.
  • Headcount: 14,138 (up 4% YoY) – Slower headcount growth compared to prior periods, but expected to increase in 2025.

Risk and Opportunity Assessment

Risks

  • Competition: Intense competition in the cybersecurity market could lead to price reductions and loss of market share.
  • Supply Chain: Continued supply chain disruptions could impact product availability and increase costs.
  • Economic Conditions: Adverse economic conditions, such as a recession or inflation, could reduce IT spending and negatively affect demand.
  • Product Vulnerabilities: Defects or vulnerabilities in products could damage the company’s reputation and lead to liability.
  • International Operations: Fluctuations in currency exchange rates and geopolitical instability could impact international sales and operations.

Opportunities

  • SASE and SecOps Growth: Expanding into the SASE and SecOps markets presents significant growth opportunities.
  • Vendor Consolidation: The trend towards vendor consolidation in cybersecurity could benefit Fortinet’s integrated platform approach.
  • Firewall Refresh Cycle: An anticipated firewall refresh cycle offers a strategic opportunity to expand market share.
  • AI Integration: Leveraging AI to enhance security operations and threat intelligence can provide a competitive advantage.

Conclusion & Actionable Insights

Fortinet demonstrates solid financial performance, driven by its service offerings and strong cash flow. However, slowing product revenue growth and anticipated increases in operating expenses warrant caution.

Overall Assessment: Hold

Recommendations:

  • Monitor Product Revenue: Closely track product revenue growth in 2025 to assess the effectiveness of strategies to address the slowdown.
  • Expense Management: Evaluate the company’s ability to manage operating expenses and maintain profitability despite increased investments.
  • Competitive Landscape: Continuously assess the competitive landscape and adapt strategies to maintain market share.
  • Supply Chain Resilience: Strengthen supply chain resilience to mitigate potential disruptions.

Financial Analysis of Fortinet, Inc. (FTNT) – 2024

1. Financial Ratio and Metric Analysis

Profitability

  • Gross Profit Margin

    • Ratio/Metric: $4,798.2 / $5,955.8 = 80.6%
    • Trend: Gross Profit Margin in 2023 was $4,067.6 / $5,304.8 = 76.7%. The Gross Profit Margin increased from 76.7% to 80.6%, a 5.1% increase.
    • Industry: The industry average gross profit margin for software companies is around 70-80%. Fortinet’s gross profit margin is at the higher end of this range, indicating strong cost management and pricing strategies.
  • Operating Profit Margin

    • Ratio/Metric: $1,803.4 / $5,955.8 = 30.3%
    • Trend: Operating Profit Margin in 2023 was $1,241.1 / $5,304.8 = 23.4%. The Operating Profit Margin increased from 23.4% to 30.3%, a 29.5% increase.
    • Industry: A good operating margin for a software company is typically between 15% and 25%. Fortinet’s operating margin is above average, suggesting efficient operations and cost control.
  • Net Profit Margin

    • Ratio/Metric: $1,745.2 / $5,955.8 = 29.3%
    • Trend: Net Profit Margin in 2023 was $1,147.8 / $5,304.8 = 21.6%. The Net Profit Margin increased from 21.6% to 29.3%, a 35.6% increase.
    • Industry: The average net profit margin for software companies is around 10-20%. Fortinet’s net profit margin is significantly higher, indicating strong profitability after all expenses and taxes.
  • Return on Assets (ROA)

    • Ratio/Metric: $1,745.2 / $9,763.1 = 17.9%
    • Trend: ROA in 2023 was $1,147.8 / $7,258.9 = 15.8%. The ROA increased from 15.8% to 17.9%, a 13.3% increase.
    • Industry: The average ROA for software companies is around 5-10%. Fortinet’s ROA is very high, indicating efficient use of assets to generate profit.
  • Return on Equity (ROE)

    • Ratio/Metric: $1,745.2 / $1,493.8 = 116.8%
    • Trend: ROE in 2023 was $1,147.8 / (-$463.4) = -247.7%. The ROE increased from -247.7% to 116.8%.
    • Industry: The average ROE for software companies is around 10-20%. Fortinet’s ROE is exceptionally high, indicating very efficient use of equity to generate profit.
  • Earnings Per Share (EPS)

    • Basic: $2.28
    • Diluted: $2.26
    • Trend: Basic EPS in 2023 was $1.47, Diluted EPS in 2023 was $1.46. Basic EPS increased from $1.47 to $2.28, a 55.1% increase. Diluted EPS increased from $1.46 to $2.26, a 54.8% increase.
    • Industry: EPS varies widely, but Fortinet’s EPS indicates strong profitability on a per-share basis.

Liquidity

  • Current Ratio

    • Ratio/Metric: $5,971.5 / $4,060.7 = 1.47
    • Trend: Current Ratio in 2023 was $4,428.3 / $3,719.0 = 1.19. The Current Ratio increased from 1.19 to 1.47, a 23.5% increase.
    • Industry: A current ratio between 1.5 and 2 is generally considered healthy. Fortinet’s current ratio is slightly below this range, suggesting adequate but not excessive liquidity.
  • Quick Ratio (Acid-Test Ratio)

    • Ratio/Metric: ($5,971.5 – $315.5) / $4,060.7 = 1.39
    • Trend: Quick Ratio in 2023 was ($4,428.3 – $484.8) / $3,719.0 = 1.06. The Quick Ratio increased from 1.06 to 1.39, a 31.1% increase.
    • Industry: A quick ratio of 1 or higher is generally considered good. Fortinet’s quick ratio indicates the company has sufficient liquid assets to cover its current liabilities.
  • Cash Ratio

    • Ratio/Metric: $2,875.9 / $4,060.7 = 0.71
    • Trend: Cash Ratio in 2023 was $1,397.9 / $3,719.0 = 0.38. The Cash Ratio increased from 0.38 to 0.71, a 86.8% increase.
    • Industry: A cash ratio of 0.5 or higher is usually considered acceptable. Fortinet’s cash ratio indicates a good ability to cover current liabilities with its most liquid assets.

Solvency/Leverage

  • Debt-to-Equity Ratio

    • Ratio/Metric: $994.3 / $1,493.8 = 0.666
    • Trend: Debt-to-Equity Ratio in 2023 was $992.3 / (-$463.4) = -2.14. The Debt-to-Equity Ratio increased from -2.14 to 0.666.
    • Industry: A debt-to-equity ratio of 1 or lower is generally considered healthy. Fortinet’s debt-to-equity ratio indicates a moderate level of debt relative to equity.
  • Debt-to-Assets Ratio

    • Ratio/Metric: $994.3 / $9,763.1 = 0.102
    • Trend: Debt-to-Assets Ratio in 2023 was $992.3 / $7,258.9 = 0.137. The Debt-to-Assets Ratio decreased from 0.137 to 0.102, a -25.5% decrease.
    • Industry: A debt-to-assets ratio below 0.5 is generally considered good. Fortinet’s debt-to-assets ratio indicates a low level of debt relative to its total assets.
  • Interest Coverage Ratio (Times Interest Earned)

    • Ratio/Metric: $1,803.4 / $20.0 = 90.2
    • Trend: Interest Coverage Ratio in 2023 was $1,241.1 / $21.0 = 59.1. The Interest Coverage Ratio increased from 59.1 to 90.2, a 52.6% increase.
    • Industry: An interest coverage ratio above 1.5 is generally considered safe. Fortinet’s interest coverage ratio is very high, indicating a strong ability to meet its interest obligations.

Activity/Efficiency

  • Inventory Turnover

    • Ratio/Metric: $1,157.6 / $315.5 = 3.67
    • Trend: Inventory Turnover in 2023 was $1,237.2 / $484.8 = 2.55. The Inventory Turnover increased from 2.55 to 3.67, a 43.9% increase.
    • Industry: Inventory turnover varies by industry. For software companies that also sell physical products, this ratio indicates how efficiently inventory is managed.
  • Days Sales Outstanding (DSO)

    • Ratio/Metric: ($1,463.4 / $5,955.8) * 365 = 89.7 days
    • Trend: DSO in 2023 was ($1,402.0 / $5,304.8) * 365 = 96.4 days. The DSO decreased from 96.4 to 89.7, a -7% decrease.
    • Industry: The average DSO for software companies is around 40-60 days. Fortinet’s DSO is higher, suggesting it takes longer to collect revenue from sales.
  • Days Payable Outstanding (DPO)

    • Ratio/Metric: ($190.9 / $1,157.6) * 365 = 60.1 days
    • Trend: DPO in 2023 was ($204.3 / $1,237.2) * 365 = 60.3 days. The DPO decreased from 60.3 to 60.1, a -0.3% decrease.
    • Industry: The average DPO for software companies is around 30-50 days. Fortinet’s DPO is higher, suggesting it takes longer to pay its suppliers.
  • Asset Turnover

    • Ratio/Metric: $5,955.8 / $9,763.1 = 0.61
    • Trend: Asset Turnover in 2023 was $5,304.8 / $7,258.9 = 0.73. The Asset Turnover decreased from 0.73 to 0.61, a -16.4% decrease.
    • Industry: The average asset turnover for software companies is around 0.5-1.0. Fortinet’s asset turnover is within this range, indicating reasonable efficiency in using assets to generate revenue.

Valuation

  • Price-to-Earnings Ratio (P/E)

    • Ratio/Metric: $110.02 / $2.28 = 48.25
    • Trend: To calculate the P/E ratio for 2023, we use the 2023 EPS of $1.47. Assuming a similar stock price, the P/E ratio would have been significantly lower. The P/E ratio increased from 2023 to 2024.
    • Industry: The average P/E ratio for software companies is around 20-30. Fortinet’s P/E ratio is higher, suggesting the stock is relatively expensive compared to its earnings.
  • Price-to-Book Ratio (P/B)

    • Ratio/Metric: Market Cap = 110.02 * 767 million shares = $84.38 billion. Book Value = $1,493.8 million. P/B = 84,380 / 1,493.8 = 56.5
    • Trend: To calculate the P/B ratio for 2023, we use the 2023 Book Value of -$463.4 million. The P/B ratio increased from 2023 to 2024.
    • Industry: The average P/B ratio for software companies is around 3-5. Fortinet’s P/B ratio is very high, suggesting the stock is overvalued relative to its book value.
  • Price-to-Sales Ratio (P/S)

    • Ratio/Metric: Market Cap = 110.02 * 767 million shares = $84.38 billion. Revenue = $5,955.8 million. P/S = 84,380 / 5,955.8 = 14.2
    • Trend: To calculate the P/S ratio for 2023, we use the 2023 Revenue of $5,304.8 million. The P/S ratio increased from 2023 to 2024.
    • Industry: The average P/S ratio for software companies is around 3-5. Fortinet’s P/S ratio is very high, suggesting the stock is overvalued relative to its sales.
  • Enterprise Value to EBITDA (EV/EBITDA)

    • Ratio/Metric: Market Cap = 110.02 * 767 million shares = $84.38 billion. Total Debt = $994.3 million. Cash = $2,875.9 million. EV = 84,380 + 994.3 – 2,875.9 = $82,498.4 million. EBITDA = $1,803.4 + $122.8 = $1,926.2 million. EV/EBITDA = 82,498.4 / 1,926.2 = 42.8
    • Trend: To determine the trend, we would need the EV/EBITDA from the previous comparable period, which is not provided in the filing.
    • Industry: The average EV/EBITDA for software companies is around 10-15. Fortinet’s EV/EBITDA is very high, suggesting the stock is overvalued relative to its earnings.

Growth Rates

  • Revenue Growth

    • Ratio/Metric: ($5,955.8 – $5,304.8) / $5,304.8 = 12.3%
    • Trend: Revenue grew by 12.3% from 2023 to 2024.
  • Net Income Growth

    • Ratio/Metric: ($1,745.2 – $1,147.8) / $1,147.8 = 52.1%
    • Trend: Net Income grew by 52.1% from 2023 to 2024.
  • EPS Growth

    • Ratio/Metric: ($2.28 – $1.47) / $1.47 = 55.1%
    • Trend: EPS grew by 55.1% from 2023 to 2024.

Other Relevant Metrics

  • Billings (Non-GAAP)

    • Metric: Billings increased from $6,399.5 million in 2023 to $6,532.5 million in 2024, a 2.1% increase.
    • Significance: Billings represent revenue plus the change in deferred revenue, providing insight into future revenue potential. The increase indicates continued demand for Fortinet’s products and services.
  • Free Cash Flow (Non-GAAP)

    • Metric: Free cash flow increased from $1,731.4 million in 2023 to $1,879.2 million in 2024, an 8.5% increase.
    • Significance: Free cash flow indicates the cash a company has available after all expenses and investments. The increase indicates improved financial health and flexibility.
  • Gain on Bargain Purchase

    • Metric: Fortinet recorded a gain on bargain purchase of $106.3 million in 2024, compared to none in 2023.
    • Significance: This gain resulted from the acquisition of Lacework and indicates that Fortinet acquired the company for less than the fair value of its assets.

2. Commentary

Fortinet’s financial performance in 2024 was strong, marked by significant improvements in profitability, as evidenced by increased gross, operating, and net profit margins. Revenue growth was solid at 12.3%, and the company demonstrated efficient asset utilization, leading to a higher ROA. However, valuation ratios such as P/E, P/B, and P/S suggest the stock may be overvalued compared to industry averages. The company’s liquidity position is adequate, and its solvency ratios indicate a healthy balance between debt and equity.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️