After Lowering Preliminary Earnings, Fortinet Execs Say They Are 'Confident' They Can Fix Sales Execution Issues
On the heels of a disappointing preliminary earnings report that showed dropping sales, Fortinet's top executives said they remain "confident in the long-term growth opportunity" for the company and will remedy the sales organization errors that led to slower-than-anticipated growth in the third quarter.
"We are disappointed with our third-quarter performance and [are] working to resolve execution errors that contributed to the shortfall," CEO Ken Xie said on an investor call after the preliminary third-quarter earnings numbers were released Tuesday. "We are confident in the long-term growth opportunity and ability to return to our shareholders," he said.
The Sunnyvale, Calif.-based security vendor said it now expects its third-quarter billings to be between $343 million and $348 million, down from its earlier guidance of between $372 million and $376 million. It now expects sales to be between $311 million and $316 million, down from between $319 million and $324 million. Fortinet said it also expects earnings per share to be lower, dropping EPS estimates from 17 cents to 18 cents a share to 15 cents to 16 cents a share.
Xie blamed the drop, in large part, on execution errors in the company's North American sales organization, stemming from a sales force reorganization in the beginning of the year. The effects of the reorganization have taken "longer than anticipated to materialize," Xie said. CFO Andrew Del Matto said Fortinet had expected to see a delayed effect from the reorganization in the back half of the year, evidenced when "deals started slipping" near the end of the third quarter.
"We are laser-focused on making improvements to this area and making our sales team more productive," Xie said.
Xie also said a longer sales cycle with customers, driven by longer purchasing decisions, as well as macro events such as Brexit also had an effect on the company's third-quarter earnings. Xie said he did not think a growing competitive landscape, which includes rivals Palo Alto Networks and Check Point Software Technologies, affected the company's earnings in the quarter.
CFO Del Matto said Fortinet is focused on "really getting to the bottom of how we improve our productivity in sales in North America." Fortinet plans to drill down on sales execution in the region, including investing in marketing and focusing on closing deals and increasing productivity, he said. The company is having "intense conversations" with sales teams and sales leaders to understand what needs to be fixed, according to Del Matto.
"We are continuing to evaluate all the factors that contributed to this and we expect to deliver on them," Del Matto said. Fortinet will provide more details when it reports earnings on Oct. 27, he said.
Fortinet said it has not made any additional major changes to its sales force since the reorganization announced in January. The company has seen the departure of some of its top marketing executives over the past year, including CMO Holly Rollo, and sources told CRN that company layoffs over the summer focused on the sales and marketing departments.
One partner executive, who did not want to be named, said he has seen a slight dip in large deals with Fortinet over the past quarter, although he said renewals and smaller deals continue to flow through.
"It seems like the loss of some of the executives in the large cuts they made have hurt them. I have also seen Palo Alto getting more aggressive with pricing to compete. I'm not sure that the sales cycles are longer, but it seems the size of deals are not there right now," the partner executive said in an email to CRN.
Another partner executive said he has not seen any impact in his sales in the past quarter with the vendor. He said he expects the sales reorganizations will have a short-term impact on the company, but "could very well be better for Fortinet" in the long term.
Fortinet declined to comment on what impact the company's drop in earnings or focus on improving sales productivity would have on partners, citing the company's quiet period before earnings.