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Fortinet CEO Xie Says Company Primed For Growth, Touts New Third-Gen Firewall Appliance And FortiGate Virtual Machine

Ken Xie tells analysts on the company's earnings that the firewall business should continue to do well as the industry starts to adopt third-generation technology such as the FortiGate 6000F.

Fortinet Monday reported solid revenue growth for its fourth fiscal quarter and full fiscal year 2017, which CEO Ken Xie said was due to a laserlike focus on key growth areas.

However, while non-GAAP income also saw solid growth for the quarter and full year, a one-time expense of $63.0 million from the new Tax Cuts and Jobs Act caused the company's GAAP profit to become a loss in the fourth quarter.

Fortinet also said its chief financial officer, Drew Del Matto, will be leaving for an unnamed new opportunity. The company named Keith Jensen as interim CFO, effective Feb. 16. He has served as chief accounting officer since May 2014.

[Related: Sources: Fortinet Channel Chief Sykora Out, Security Vendor Appoints Former Proofpoint Exec Bove To Lead Partner Sales]

The Sunnyvale, Calif.-based company Monday also unveiled new products it said will help deliver strong growth in 2018, with Xie saying Fortinet is seeing more market momentum than it has since its founding.

"Based on reported billing, Fortinet grew faster than any of our competitors," Xie said during the company's Monday quarterly financial conference call. Xie told analysts during the call that Fortinet sees four growth engines in 2018.

The first is core networking security driving overall networking and software-defined WAN business in general.

The second, Xie said, is the fact that Fortinet is only just beginning to scratch the surface of security adoption, with billing related to the adoption of its security fabric accounting for only one-quarter of its total billing.

The third is cloud security, which Xie said is the fastest-growing part of Fortinet's business. Security is now extending to multi-cloud environments, and Fortinet security runs on Microsoft Azure, Amazon Web Services, Google Cloud, IBM Cloud and Oracle Cloud, he said.

The fourth factor is growing security needs related to the Internet of Things, he said.

When asked by an analyst about the possibility of a slowdown in product sales because of increased cloud adoption, Xie said he does not see that happening. He cited the release Monday of Fortinet's new FortiGate 6000F, which he called the industry's fastest next-generation firewall appliance, as well as a FortiGate virtual machine, as examples of how the company should continue to show product growth going forward.

Xie also said that Fortinet is unique in the industry with its security fabric and has a strong services business. "Overall, we see a pretty strong growth in product and services," he said.

Xie said the firewall business should continue to do well as the industry starts to adopt third-generation technology such as the FortiGate 6000F, especially since it can work with a wider range of applications than previous generations.

"The difference in the third generation versus the second generation is not [just] replacing the second generation, but becoming part of the solution. … Now it's getting tied to cloud, to internet, to APs [access points]," he said.

After one investor expressed concern that widespread adoption of the cloud and SD-WAN technology might impact network security sales, Xie said he does not see that as an issue.

Fortinet is protected against migration of data to the cloud by being the only company to develop its own ASICs, which leads to improved performance and lower cost than competitors, he said. Fortinet also offers a broad fabric solution, something no competitors have, he said. "We built it in from day one," he said.

Xie also said that SD-WAN remains a low-cost alternative to hardware-based networking and does not offer the performance to address integrated security issues. "[We have] a huge performance advantage compared to others," he said.

For its fourth fiscal quarter of 2017, which ended Dec. 31, Fortinet reported revenue of $416.7 million, up 15 percent over the fourth fiscal quarter 2016 revenue of $362.8 million. Billings for the quarter reached $534.0 million, up 15 percent over last year.

For the quarter, Fortinet reported a GAAP loss of $29.0 million, or 17 cents per share, compared with last year's income of $25.2 million, or 15 cents per share. The quarter's loss included the tax expense because of the new tax legislation.

During the fourth fiscal quarter, sales to the Americas represented Fortinet's fastest-growing market with a 16 percent annual growth rate.

GAAP income for the year was $31.4 million, or 18 cents per share, down slightly from the prior year's $32.2 million, or 19 cents per share. That included the $63 million one-time tax expense.

Non-GAAP income for fiscal 2017 was $184.7 million, or $1.04 per share, up from fiscal 2016's non-GAAP income of $129.5 million, or 73 cents per share.

Looking forward, Fortinet expects first-quarter 2018 revenue of between $387 million and $393 million, representing a 15 percent growth at the midpoint.

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