Fortinet Top Execs Say North American Sales Growth In Q1 "Validates" Sales Structure Revamp

A little more than a year after Fortinet revamped its sales structure in the region, company top executives said the security vendor's growth in North America in Q1 validates the company's reorganization after many months that were slow to show progress.

Fortinet announced in January 2016 that it was reorganizing its U.S. enterprise sales team, redistributing it into two groups focusing on either global strategic accounts or regional territories. The changes were slow to show results as the changes took hold, creating some "execution challenges" and causing the Sunnyvale, Calif.-based vendor to lower its sales and earnings expectations last fall.

However, Fortinet started to see gains last quarter from the changes, and now in its first quarter earnings call Thursday, CEO Ken Xie said the company's growth in North America "validates the sales structure revamp" and the company's continued focus on productivity and efficiency. Billings growth in the U.S. was about 31 percent, CFO Andrew Del Matto said.

[Related: Fortinet CFO Says Sales Reorg Is Working: Stock Soars After Strong Q4 Earnings And Forecast]

Xie said that is a different approach from the company's competition, which has "aggressively [gone] to market in sales and this has failed to sustain over the long term," he said, alluding to Palo Alto Networks' recent sales misstep in its recent quarterly earnings. He said the security industry is looking for companies to have a "more efficient and healthy model to sustain for the long term."

"We are very pleased with the first quarter results and progress Fortinet is making," Xie said on the earnings call. "The Fortinet Security Fabric is winning in the marketplace and we are gaining market share against our competition. We believe over the long term the operating model will bring the best value to our shareholders."

Fortinet sales overall for the quarter, which ended March 31, were up, rising 20 percent year over year to $340.6 million. Billings were up 22 percent year over year to $403.3 million. Earnings for the first quarter were $10.7 million, up from $2.1 million in 2016.

Fortinet executives said the company continues to push to improve its margins, looking to hit 25 percent margins by 2022 and remain between 25 and 30 percent margins after that. To get there, CFO Del Matto said on the call that the company has "carefully considered our investment strategy" and is making critical investments in sales and marketing. The company is also maintaining a flat organization, has made productivity improvements, is scaling out administrative functions, is training for higher productivity, and is hiring very carefully. He said Fortinet is also focused on topline growth, focusing particularly on driving higher-price recurring revenue streams.

"We are seeing the benefits of our focused efforts and strategy," Del Matto said. "We're very focused and committed to driving the higher margins. We're trying to ramp there in a productive way. We feel like we have done a very good job building the model we want in terms of our go-to-market strategy adjustments we have made and now we're very focused on the higher margin recurring revenue streams that are coming in," he said. Del Matto said Fortinet is also being careful to make sure the improvements to drive better margins and improve productivity don't disrupt the company overall.

CEO Xie said Fortinet is also focused on driving its Security Fabric vision, which pushes a platform security strategy and integrates the company's broad set of security solutions. Xie said Fortinet is seeing strong traction with customers for the Security Fabric, saying customers are looking to consolidate the number of vendors they work with. Del Matto said this was evidenced in the numbers by growth in large multi-product deals and sales of non-FortiGate products to enterprises.

"I think the consolidation theme remains profound out there," Del Matto said. "The Fabric is clearly resonating in the larger deals we do. It's a common theme. I think that’s very consistent in what we saw in Q4 and what we see moving forward."

Fortinet said it expects second quarter billings between $425 million and $432 million and sales between $357 million and $363 million. The company said it expects quarterly earnings per share between $0.19 and $0.20. Fortinet also updated its guidance for the full year to reflect the current quarter performance, now expecting billings between $1.77 billion and $1.792 billion and sales between $1.485 billion and $1.495 billion. The company now expects earnings per share between $0.89 and $0.91.