Fortinet’s Financial Performance in 2015
Tech Volatility Check: What's up with Fortinet's Stock Lately?
Subscription revenues growing faster than product revenues
Previously in this series, we discussed Fortinet’s revenues and growth across geographies in fiscal 4Q15 and 2015. Now let’s have a look at the company’s margins during those periods.
In the prior part of the series, we talked about how the company’s subscription revenue grew by 34% to $151.8 million, which exceeded product revenues. Product revenues and service revenues contributed 47% and 53%, respectively, toward overall revenues. (A subscription-based business provides recurring revenues that are stable and predictable, which is why it is generally preferable.)
Increasing competition means more for SG&A
Although Fortinet’s gross margin rose from 71% in 2014 to 73% in 2015, its operating income fell by 3% from 16% in 2014 to 13% in 2015. The reason for this margin contraction can be attributed to the increasing competition in the cybersecurity space.
Increasing competition from leading network security players—namely, Cisco Systems (CSCO), Check Point (CHKP), Juniper Networks (JNPR), and Palo Alto Networks (PANW)—has forced Fortinet to allocate more funds toward and S&M (sales and marketing) and G&A (general and administrative) expenses. These expenses together went from 5.4% of total revenues in 2014 to 7.8% in 2015, which also explains the contraction in operating margins.
Investors wanting to gain exposure to the cybersecurity space might consider investing in the PureFunds ISE Cyber Security ETF (HACK), which has a portfolio of 32 stocks made up of companies like FireEye (FEYE), Qualys (QLYS), and Palo Alto Networks (PANW). HACK invests about 5% of its holdings in Fortinet.
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