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Fortinet IPO: Love Of Services

Whether the maker of network security solutions can successfully sell shares to investors during one of the most turbulent stock market periods in decades is anyone's guess, but if the bull market continues, Fortinet has a good chance of raising at least $100 million.

software network security

From a channel perspective, the company is riding high based on the results of our 2009 Annual Report Card survey in which channel partners rated Fortinet tops in the network security hardware category based on their experience with the FortiGate product and channel program and support. The company has had a steady climb in the ARC, rising from seventh place in 2007 to third last year and then taking first against rivals Cisco, Juniper, SonicWall and Trend Micro this year. I am not sure if there is any correlation between ARC results and stock performance, but Fortinet's investment bankers -- which include Morgan Stanley and J.P. Morgan -- should be using some of the findings to impress investors, especially since partners gave it a score of 93 in revenue and profit potential.

Fortinet, which claims to have 14 percent market share in the UTM appliance market, is sensing some early momentum in the IPO market and has decided to raise millions for what is known in the IPO world as "working capital" and other general corporate purposes. In other words, the company wants to fund new projects, products or acquisitions.

While Fortinet has been on a bit of tear lately, it is interesting to note that its services business has been driving growth. In 2008, product and services sales surged 37 percent to $211.8 million from $155.5 million. Overall, its fortunes turned around in 2008 when it posted a profit of $7.4 million vs. a huge $21.8 million loss in 2007. As of June, the company had shipped some 450,000 appliances to 5,000 channel partners and 75,000 customers worldwide, the prospectus states.

Still, the revenue mix changed in the first six months of 2009 as product sales declined 2 percent to $43.8 million and services rose 36 percent to $65 million. The company's revenue shift also impacted its first-half profit picture as it produced an $8.35 million profit vs. a loss of $5.1 million in the first half of 2008. The security company's services revenue comes from security subscription services updates along with Internet and phone-based support. Yet Fortinet also disclosed it generates a small portion of its revenue from professional services. The specter of a growing services division is an area of concern for current and future Fortinet partners, who will have to weigh any channel conflict against the sales opportunity. Fortinet, like most successful software firms, does have incredibly high gross margins -- 73 percent for the first half -- and has generated $136 million in cash thus far and no debt.

While they are not business celebrities now, you will be hearing more about Fortinet founders Ken Xie and Michael Xie. Together they hold 32.5 percent of the pre-IPO and those holdings will no doubt turn them in to multimillionaires once the offering is completed. An interesting note about 46-year-old Ken Xie. He was the founder of NetScreen Technologies, which many of you may remember was acquired by Juniper and was the impetus behind the company's push into the mainstream channel. Michael worked with him at NetScreen, so both of these engineers have the Midas touch. At press time, Fortinet had not yet set a price for its shares.

BACKTALK: Comment on this column at community.crn. com. Contact Senior Vice President/Editorial Director Robert C. DeMarzo at

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