© 2023 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

Fortinet’s multifaceted approach accelerates its commitment to eliminate the cybersecurity skills gap. CONTRIBUTED PHOTO

Fortinet Inc. shares rallied in the extended session Tuesday after the cybersecurity company’s earnings topped Wall Street estimates, and its outlook forecast a slightly better-than-expected year.

Fortinet FTNT, -1.22% shares surged as much as 18% after hours, following a 3.4% rise in the regular session to close at $53.78.

Ken Xie, Founder, Chairman of the Board and Chief Executive Officer at Fortinet.

Fifth-generation security processing unit (FortiSP5) delivers power-efficient performance to open new frontiers for securing the branch, campus, 5G, edge compute, operational technologies and more.

Ken Xie, Founder, Chairman of the Board and Chief Executive Officer at Fortinet, says: “With the introduction of FortiSP5, Fortinet once again sets new industry records for performance, cost and energy efficiency. As the only cyber security vendor leveraging purpose-built ASICs, an over 20-year investment in innovation, Fortinet delivers the secure computing power that will support the next generation of secure infrastructure.”

Fortinet (NASDAQ: FTNT), the global cyber security leader driving the convergence of networking and security, today announced FortiSP5, the latest breakthrough in ASIC technology from Fortinet, propelling major leaps forward in securing distributed network edges. Building on over 20 years of ASIC investment and innovation from Fortinet, FortiSP5 delivers significant secure computing power advantages over traditional CPU and network ASICs, lower cost and power consumption, and the ability to enable new secure infrastructure across branch, campus, 5G, edge compute, operational technologies and more.

With an application-specific design and embedded multi-core processors to accelerate the convergence of networking and security functions, FortiSP5 delivers:

• 17x faster firewall performance compared to leading standard CPUs;
• 3.5x faster next-generation firewall (NGFW) performance compared to leading standard CPUs to handle higher levels of traffic inspection to detect and block threats;
• 32x faster encryption to protect sensitive data and secure virtual private networks;
• 2.5Gbps of SSL deep inspection to deliver the processing power needed to inspect encrypted traffic for malware without performance issues;
• Secure boot to allow only approved operating system software to boot up, protecting critical infrastructure against malicious tampering;
• Volumetric DDOS protection to thwart distributed denial-of-service (DDOS) attacks;
• VXLAN/GRE hardware-accelerated encapsulation to enable secure interconnectivity for distributed networks; and
• Hardware-accelerated quality of service (QOS) to enhance user experience with dedicated QOS for sensitive applications such as video conferencing.

As a fifth-generation 7-nanometer chip, FortiSP5 packs more capabilities in a smaller form factor to deliver:

• Eighty-eight percent less power consumption compared to the leading industry-standard CPU;
• Industry-leading performance per watt; and
• Industry-leading price-performance.

Supporting more applications to enable important customer use cases

With the ability to accelerate and concurrently run two times more applications – for example, NGFW, zero-trust network access (ZTNA), SD-WAN and SSL inspection –compared to the previous generation, FortiSP5 will support use cases such as:

• Branch/campus: FortiSP5 ensures the transition to SD-Branch is efficient and cost-effective in a small form factor, enabling IT staff to simplify management and reduce opex while increasing network uptime. Additionally, as more organisations embrace the cloud and hybrid work model, FortiSP5 will continue to be a driver for Secure SD-WAN to empower customers to securely and seamlessly access applications anywhere while delivering consistent user experience with an optimised platform.
• Edge compute: As edge computing improves efficiency and cost control through processing close to the edge, FortiSP5 supports high-speed networks and security threat protection for both commercial and operational technology (OT) environments, minimising bottlenecks for traffic movement.
• Operational technology: The convergence of IT and OT has opened the infrastructure to increased security risks that can disrupt operations. FortiSP5 enables scalable convergence, securing both OT and IT infrastructures with a single, high-performance platform.
• 5G: 5G adoption is on the rise in enterprise networks, fuelling innovation at the edge as it provides higher bandwidth and lower latency. FortiSP5 enables a seamless transition to support 5G with an optimised and sustainable platform.

FortiSP5 will power the next generation of entry and mid-range FortiGate firewalls being released later this year. Now on its fifth generation, we believe Fortinet’s proprietary system on a chip technology has a proven track record of powering the industry’s top-performing products and solutions. A few examples include:

• Fortinet has been named a leader in the 2022 Gartner Magic Quadrant for Network Firewalls, marking the 13th time Fortinet has been recognised in this Magic Quadrant.
• A recent Forrester study highlighted that customers deploying Fortinet’s Secure SD-WAN solution, which is backed by FortiGate and SOC technology, achieved a 300% return on investment over three years with a payback period of only eight months.

The energy efficiency and performance per watt of FortiSP5 and the products that leverage the chip will help organisations reduce their power and space requirements. Fortinet remains committed to sustainable product innovation to ensure each generation of its products consumes less energy and is built sustainably.

Today, Fortinet’s Sunnyvale headquarters is a net-zero emissions facility and plans for global operations to be completely carbon neutral by 2030. Fortinet was recently named to the 2022 Dow Jones Sustainability World and North America Indices as one of the top sustainable companies in the world, highlighting Fortinet’s commitment to achieving a sustainable society.

“Enterprise applications and the users and devices that access them are more distributed than ever, which is causing organisations to rethink their edge network and security architectures. A key to enabling enterprise edge networking is having strong security without compromising on network performance and user experience. Fortinet has a 20-year history in ASIC technology that helps achieve these goals, and the company’s newest FortiSP5 continues that legacy. Fortinet’s portfolio of converged network and security solutions with custom chips helps enterprises accelerate their edge network and security transformation,” says Brandon Butler, Research Manager, Enterprise Networks at IDC.

© 2023 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

Fortinet (NASDAQ:FTNT) and Tenable (NASDAQ:TENB) led cyber security stocks higher on Wednesday as investment Wedbush Securities praised the duo after they reported strong fourth-quarter results and guidance for 2023.

Analyst Dan Ives, who has an outperform rating on both Fortinet (FTNT) and Tenable (TENB), noted the two showed continued strength in the federal spending area as well as commercial enterprise.

Regarding Fortinet (FTNT), Ives said the results were "generally solid," even if there was a slight miss in revenue compared to expectations, but that other metrics were well above Wall Street expectations.

"Although, Fortinet is held to a higher standard by the Street given the company's history of large beats stacking against its competitors, we believe this performance and outlook were bullish not just for Fortinet but as a barometer on overall cyber security spending with many bears waiting for a huge stumble out of the gates," Ives wrote in a note to clients.

Ives added billings growth, strong free cash flow performance and a "formidable" business model make Fortinet (FTNT) "attractive" at these levels.

He boosted his per-share price target to $70 from $64 following the results.

Fortinet (FTNT) rose nearly 14% to $61.21 in early trading on Wednesday.

On Tenable (TENB), Ives said the most important takeaway from the results was the "solid" guidance for 2023, increasing confidence going into the new fiscal year.

"It's clear that Tenable is gaining a bigger foothold in enterprise and federal deal flow which adds to the confidence for the 2023 growth story," Ives wrote.

Tenable (TENB) expects first-quarter revenue to be between $186M and $188M, compared t expectations of $190.9M, while full-year revenue is expected to be between $800M and $810M, compared to expectations of $815.8M.

Tenable (TENB) tacked on 3.6% to $44.99 in early trading.

Other cyber security stocks moved higher on back of the results, Zscaler (ZS), CyberArk Software (CYBR), Check Point Software Technologies (CHKP) and Palo Alto Networks (PANW).

Late last month, Wells Fargo listed Tenable (TENB) among its top "tactical ideas" in the cybersecurity space.

Investment Thesis

Fortinet (NASDAQ:FTNT) has a less-than-straightforward story. Its business makes the bulk of its revenues from its Product segment. Something that the Street has generally been skeptical of.

But what Fortinet has excelled in, is in delivering high ROI to its customers, through its low cost-for-performance hardware. Consequently, this has allowed Fortinet to print free cash flow.

Indeed, this quarter we saw Fortinet's free cash flow jump 48% y/y. Reminding investors that there's much to like here, so let's get to it.

Fortinet's Near-Term Prospects

Fortinet continues to push forward with its Service segment. Even though the Service segment ever-so-slightly decelerated sequentially from 28% y/y CAGR to 27% y/y CAGR, these figures are quite compelling.

Particularly given that Microsoft's Azure (MSFT) and Amazon's AWS (AMZN) have both had their earnings results and the figures show that cloud enterprise spending is coming down.

However, the big theme for 2023, I suspect, will be around AI. Being a cybersecurity vendor for AI platforms could be a meaningful tailwind for cybersecurity companies.

That being said, the one aspect that has held back Fortinet in the eyes of investors has been the fact that the majority of its revenues come from its Product business. But this may be less bad than it sounds. Here's why.

Given the industry trend towards ''renting'' software services, investors have generally been skeptical of Fortinet's long-term prospects. Given that point of view, Fortinet used their earnings call to highlight that:

[...] a recent Forrester report highlighted that customers deploying Fortinet Secure SD-WAN solutions achieved a 300% return on investment over three years with a payback period of only eight months.

In sum, the story isn't over for Fortinet. Now, let's dig into its financials.

Revenue Growth Rates Are Fair

Fortinet's guidance for the year ahead isn't all that impressive. But what it does show is that there's ''at least'' 22% top line, if we assume that management is lowballing estimates, to leave room to positively impress investors over the coming quarters.

What's more, given that its billings for Q1 2023 are at 26% y/y and higher than the revenue growth rate guidance for Q1 reinforces the overall image that Fortinet's pipeline of future revenues to be ''recognized'' is healthy.

What's more, Fortinet once again reiterated that it believes it can continue to grow its operations to $8 billion in revenues by 2025. This would imply that investors getting involved today would be getting the ''reassurance'' that Fortinet can put out a 22% CAGR over the next two years.

What's more, given that Fortinet has been unwavering in its outlook for some time now, combined with its near-term guidance being compelling, certainly gives credence to its multi-year outlook.

Next, we'll turn our focus to what's arguably the best reason to own Fortinet.

Fortinet's Bull Case Laid Out

Remember 2020? A period when it was ''uncool'' to be profitable? Throughout that period, Fortinet had one of the weakest performances amongst its cybersecurity peers.

Nevertheless, Fortinet continued to plow forward and lay down the work then, to literally ooze free cash flow now.

Accordingly, Fortinet's guidance for 2025 points to somewhere in the ballpark of $3 billion of free cash flow. For a cybersecurity business that's priced at approximately 15x 2-years forward free cash flows, this is really an attractive valuation.

Given the value of its shares, Fortinet has steadily and consistently repurchased its own shares. But here comes the most shocking aspect! Check out the red arrow below.

This is a rare breed of tech companies where repurchasing shares after stock-based compensation actually brings down the total number of shares outstanding.

That being said, it should be noted that looking ahead to 2023, the total number of shares is estimated to trickle higher by approximately 1%, reversing some of the progress of 2022.

The Bottom Line

The message coming out of Fortinet this quarter is about setting the record straight.

What customers actually want in this environment is savings. The time when enterprises were willing to spend beyond the budget to be safe online may be taking a breather after 2020-2021 saw a very strong pull forward in demand.

In sum, paying around 15x Fortinet's 2025 free cash flows is a compelling investment.