Fortinet's Q2 Challenges Carry Over To Q3

Fortinet Inc FTNT shares plunged more than 12 percent after it cut its third quarter outlook as challenges raised in the second quarter, such as weakness in Americas and longer sales cycles, continued into the third quarter.

Fortinet now expects non-GAAP EPS of $0.15 to $0.16, down from prior guidance of $0.17 to $0.18 and trimmed its total revenue view to $311 million to $316 million from $319 million to $324 million.  The company also slashed its billings outlook to $343 million to $348 million from previously announced guidance of $372 million to $376 million.

Related Link: Citi Cuts Fortinet's Target To $31 On Negative Q3 Preannouncement

“Fortinet's ability to both sustain growth and drive margins higher Looks increasingly at risk as the company sees further deceleration in Q3— keeping us on the sidelines despite a relatively undemanding valuation,” Morgan Stanley analyst Melissa Gorham wrote in a note.

“While mgmt has been focused on improving operating margins in 2016, this is likely off the table with the Q3 billings shortfall, calling into question Fortinet's ability to post stable growth alongside margin leverage,” Gorham continued.

The analyst noted that the current scenario reminds similar situation in 2012/2013 when Fortinet saw cyclical weakness, resulting in lower billings and margins. The stock didn't start working until billings growth improved, about three quarters after the first miss.

“Today may be a similar setup, although valuation likely limits the downside with FTNT at 15X our new NTM FCF (vs. an average of 17X NTM FCF in FY13),” Gorham added.

Gorham maintained Equal-weight rating, but cut the price target by $2 to $33.

At time of writing, shares of Fortinet fell 12.47 percent to $29.84.