NSE6_FAC-6.4 guide - NSE 6 - FortiAuthenticator 6.4 Updated: 2024

A good way to minimize errors in investment is to align it with macrotrends. Cybersecurity is one such trend as it deals with protecting the vast amount of data generated globally on a daily basis. Fortinet (NASDAQ:FTNT) is a good way to gain exposure to this sector as it combines several aspects I appreciate in a high-quality business: a founder at the helm who is aligned, competitive advantages, strong margins and returns, and low debt. Despite the technical challenges in the sector, I believe we can approach the investment in Fortinet from a less technical and more qualitative perspective.

Business Model

Fortinet, Inc. is one of the leading companies in the cybersecurity sector. It is a technically challenging industry with constant disruption and change. The company provides multiple solutions in the form of software and hardware for its clients. In Q3, the management announced its sales segmentation into Secure Networking, Secure Operations, and Universal SASE. They indicated their intention to expedite the transition of the business to the latter two, as they are cloud-based components. To achieve this, Fortinet has invested significantly in Point of Presence (POPs) infrastructure. A POP is a physical location in a network where devices, users, or services can connect to access other points in the network. According to Barclays Global Technology, Media & Telecommunications Conference, over the past two years, Fortinet has built 30 POPs (with another 35 in progress). Through a partnership with Google, they now have access to 180 new POPs, enabling them to catch up with competitors who typically have between 100 and 200. POPs often refer to facilities that include data centers. Nevertheless, Fortinet's strategy of building their own POPs is beneficial for future cost savings and greater vertical integration, despite the higher current capital expenditure. Additionally, Fortinet manufactures its own ASICs (application-specific integrated circuits), chips created exclusively for Fortinet's hardware and software. This in-house production enhances performance and, in the long run, reduces costs.

Market

Fortinet's Total Addressable Market is enormous, standing at $125 billion. The company's billings in 2023 are projected to reach around $5.3 billion, indicating that Fortinet currently holds only a 4% market share. This is within a highly fragmented market that is experiencing annual growth rates of 10%.

Fortinet combines a business model that sells both software and hardware. Although the hardware segment experiences slower growth and lower margins, it contributes to building an ecosystem. Once a device is installed at a customer's site, cross-selling becomes much easier. They anticipate double-digit growth for the hardware segment in the coming years. Fortinet attributes this expected growth to their superior product in this area, positioning them to gain market share when it's time for competitors' hardware replacements, as they are the largest player in this domain. However, it is highly likely that the services segment will grow at a faster rate, and since it has higher margins, we can anticipate future operational leverage for the company. Within the subscription services, there is the AI product, along with customer support, training, and repairs services.

The slowdown experienced in the Secure Networking segment (which constitutes 70% of sales), especially in the Hardware division, follows an absolute boom post-COVID, during which customers made substantial purchases. Currently, customers are more cautious about their buying decisions, leading to inventory accumulation. However, there is an expectation that inventories will return to normal levels, allowing for the satisfaction of future demand. Given the technological nature of this product, the extent of obsolescence during inventory holding is uncertain. It's worth noting that this segment has still achieved a solid 9% growth, though it previously grew at a rapid pace of 40%. Despite facing a challenging comparison base, the company has managed to maintain a commendable growth rate.

Moreover, it's essential to consider that these cycles typically last two years, implying that we might be at the midpoint of the cycle, and the market could soon start factoring in its conclusion. As illustrated, sales are a lagging indicator, and attention should be directed towards Billings for a more timely assessment.

Management and Capital Allocation

If management by itself is one of the most important aspects of a company, in a sector as disruptive as cybersecurity, investing in a management team we can trust is extremely important. The founders, Ken Xie and Michael Xie, have been with the company since the year 2000, and together they control more than 15% of the outstanding shares. Their interests are fully aligned with the shareholders. Their extensive knowledge of the sector is significant, and their capital allocation strategy has been very effective.

The Net Income to Free Cash Flow conversion is over 100%, thanks to it being a subscription-based business. Most of the free cash flow has been allocated to share buybacks (reducing outstanding shares by -10% over the last 7 years) and some small acquisitions. Stock options represent 5% of sales and 14% of Operating Cash Flow, with a decreasing trend. This is quite favorable for a technology company. The company operates without debt and S&P Global rates Fortinet's credit category as BBB+. 90% of the capital allocated to "innovation" has been invested in research and development, with the remaining portion dedicated to merger and acquisition activities.

Competitive Advantages

In my opinion, the key strength of this company lies in its unified platform, FortiOS (Fortinet Investor Relations Presentation, slide 31), which integrates various products and services rather than creating standalone solutions that are difficult to integrate. This not only generates a network effect but also presents high switching costs for customers, potentially leading to pricing power. The ecosystem created by the company makes it indispensable for the customer.

Financials

Fortinet's financials are impeccable. It has experienced very high double-digit growth in all its figures. For example, sales have grown at a rate of 23.5% (6-year CAGR), while FCF/share has grown at a rate of 63.5% (6-year CAGR), driven by operational leverage and share buybacks. This operational leverage has been due to a significant expansion of margins; for instance, the EBIT margin has increased from 7% in 2017 to an estimated 27% for the fiscal year 2023, although I will provide further commentary on this below. The returns are impressive, with average ROICs exceeding 100% in recent years. They also maintain a net cash position, with only around $1 billion in debt. Lastly, they follow an asset-light business model, where maintenance CAPEX ranges from 2% to 3% of sales.

In the Barclays Conference, management also discussed something about the margins. In the long term, their target is 25%, but the senior vice president mentioned that he wanted the flexibility to invest in marketing, R&D, or whatever was necessary to grow the business without being constrained by the margin. In their models, a 25% margin is feasible, especially as the services segment is expected to grow more than hardware. The 27% margin from last year was attributed to the strength of the dollar, as they invoiced in dollars but paid 70% of their staff in their local currencies (which were depreciated at that time). I always appreciate a management team focused on the long-term sustainability of the business, even if it means impacting current accounting with investments that enhance their competitive advantages.

Valuation

To evaluate Fortinet, I will use a discounted cash flow model, incorporating a discount rate of 10%, a terminal growth rate of 3%, and a free cash flow growth of 15% (historically, it has been 60% CAGR in recent years). With these assumptions, the calculated fair value for Fortinet is $60 per share. If we consider a scenario with higher growth, such as 20%, the fair value would be $85 per share. However, to account for this increased growth, it might be more appropriate to raise the discount rate to 12%, in which case the fair value would be $63. In any case, I believe that Fortinet's stock is undervalued, and that's why I rate the stock as a buy.

Risks

It is worth noting that 57% of total sales come from only three distributors. In the FY21 annual report, it's mentioned that the Exclusive distributor accounted for 31% of sales. This significant concentration not only poses a risk in itself but also raises the consideration that these distributors might resell products from competitors and could be incentivized to favor these competitors in the future, potentially at the expense of Fortinet. Nevertheless, the risk of these distributors severing ties with Fortinet, one of the top companies in the sector, seems remote. It's akin to a sports channel specializing in football, breaking agreements with the Premier League and ceasing to broadcast it. Clearly, it's a lose-lose situation for both parties. Furthermore, another major client would likely seek to absorb this new volume and gain an advantage over others. The situation appears unlikely, despite the increasing customer concentration, as these dynamics are inherent to the sector. For example, Palo Alto Networks also has 50% of its sales with three clients (cybersecurity application providers).

Inventory Risks: The accumulation of hardware devices in inventories may not always be favorable. While it enables the company to meet growing demand when the cycle changes, there is a risk of obsolescence in a rapidly evolving sector. Furthermore, 88% of their hardware is produced in Taiwan, which could be impacted in the event of a future conflict with China. However, the company likely has contingency plans in place to address this potential issue if it arises.

Disruption Risk: Given the rapid emergence and evolution of new threats today, Fortinet has a dedicated department responsible for identifying these emerging threats. They investigate these threats using AI and subsequently develop corresponding mitigations to distribute to subscribed customers. It's noteworthy that customers pay for subscriptions to benefit from these services for a period ranging from 1 to 5 years. Furthermore, thanks to its scale, Fortinet has a very high R&D budget in absolute terms, as well as an extensive customer distribution. All of this is complemented by founders at the helm with deep knowledge of the industry.

Conclusion

In conclusion, I believe Fortinet is a great company for having exposure to the cybersecurity sector. The lack of expertise can be mitigated by placing trust in a well-aligned management team with expertise in the field. Additionally, the fantastic fundamentals and scale provide protection against disruptive threats. The company can also defend itself through the ecosystem it creates by combining software and hardware, even as it increasingly focuses on the more profitable segments of services. Overall, I find the price attractive, and I anticipate satisfactory long-term results.

The modern concept of synergy was proposed by chemists. They discovered that every time they separated atoms or molecules from a complex compound, the behavior of the separate parts could never explain the behavior of all of them interconnected. For example, the chemical behaviors of isolated hydrogen (H₂) and isolated oxygen (O₂) do not offer any kind of information about the chemical behavior of water (H₂O). Chemist called this principles synergy, a form of collective transmutation that allowed for endless research and innovation in chemistry.

By the same token, Synergy is actually a systemic principle that explains how a team's collective performance is unpredictable based solely on its member’s individual performances. Therefore, a team’s collective performance can be either better or worse than the sum of its members’ individual performances. This introduces a level of risk that is widely overlooked by most authors and that holds the key to understanding organizational success versus organizational failure. This is why we must talk about positive synergy versus negative synergy and how to pursue the former while avoiding the latter.

Positive synergy vs. negative synergy

Going back to chemistry for just a moment, we know that if we add sulfur (S₈) to a controlled environment already containing water (H₂O), given the right temperature and pressure conditions we can turn said water into sulfuric acid (H₂SO₄). In other words, we can transform a life-giving substance, water, into a destructive one, sulfuric acid. This is a metaphor to show how positive synergy can be turned into negative synergy by adding the “wrong” element. In teamwork, the same can happen.

In this regard, introducing the “wrong” person into a team can have devastating effects on performance. Achieving and sustaining positive synergy is a very complex task, and it starts with hiring the right people. Of course, positive synergy depends also on good leadership and other ongoing people-management processes. However, anyone who has ever had real team leadership responsibilities knows that hiring the wrong person is far worse than not hiring the right person. Figuratively speaking, it is a lot more difficult to turn a piece of carbon into a diamond than to continue to mine for actual diamonds. The question is, then, what should organizations do to achieve positive synergy?

The chemistry of teamwork

I have found that, just as the numbers of protons, neutrons, and electrons define the potential for chemical synergy,  Let us explore each of these factors further.

• Common interests. When people share common interests, they align their individual efforts toward the same goal. More specifically, they find personal affinities that help them work together, seek opportunities to leverage each other’s talents, and measure the results of their collective efforts with respect to their common goal.
• Common values. When people share common values, they can forge strong, long-lasting alliances. More specifically, I have found that people who share the values of humility, honesty, trust, and discipline achieve the highest synergies.
  1. Humility is the capacity to acknowledge one’s own truth. This allows every team member to have a clear image of the self and address all personal growth and professional development needs in a timely fashion.
  2. Honesty is the capacity to share one’s own truth with others. This allows team members to know each other more closely, develop trust, help each other, and carry out team improvement initiatives with further reach.
  3. Trust is the ability to focus on one’s task while letting others focus on theirs, thus optimizing efforts. Equally, trust also allows for team members to check up on each other to make sure all tasks remain aligned with the common goal. Likewise, trust leads naturally to loyalty and solidarity.
  4. Discipline is the ability to continue to work toward a goal regardless of the circumstances. Discipline requires commitment, courage, resilience, and drive.
• Complementary talents. When people have complementary talents, they can overcome adversity, stay focused, and achieve success more efficiently. In my professional opinion, every team’s ideal portfolio of talents is masterfully summarized in Dr. Ichak Adizes’s famous PAEI model. PAEI stands for Producer, Administrator, Entrepreneur, and Integrator. Not one person will have all four talents. Even the so-called Renaissance men or women, known for being multi-talented, will hardly be able to develop and apply all talents successfully within a team. Everyone needs help and teamwork is based on team members helping each other. Below, each talent in detail.
  1. Producers focus on the end result and make sure the final product or service meets all customer or client expectations. Producers are ultimately responsible for quality facing the market so they will make sure all other team members understand the importance thereof.
  2. Administrators focus on how the tasks are completed and make sure all other team members are in compliance with current policies, procedures, mandates, and guidelines. They are ultimately responsible for the overall sustainability, effectiveness, and efficiency of the organizational system.
  3. Entrepreneurs focus on envisioning and creating the future. They are inspired and inspiring. They often come up with new ideas about products, services, and ways to do everyday task. They are essentially behind every major innovation and are ultimately responsible for helping organizations stay current, move forward, and introduce market- disruptive innovations.
  4. Integrators focus on bringing people together and helping build personal and functional bridges among all team members. They are ultimately responsible for creating an organizational culture based on the vision and values shared by all team members.

See also: Han Solo Vs. Boba Fett: A Lesson On Talent Acquisition

When all the aforementioned factors are in synch, team synergy will most likely be positive. However, when they are out of synch, team synergy will most likely be negative. Consequently, in order to achieve positive synergy, organizational leaders must make sure their organization’s vision, values, and talent portfolio are aligned with each other and with market needs. Furthermore, organizational leaders must make sure their recruiting and leadership practices support such alignment.

What do you think?

Have you ever been part of a synergic relationship? Have you ever achieved positive synergy with your work team? What do the 11 laws of systems thinking have to do with seeking, achieving, and sustaining positive synergy? Have you ever experienced negative synergy? In your experience, what are the main obstacles to achieving positive synergy?

Luis E. Romero is an MIT-trained Economist, certified coach, professional speaker and published author. Follow him on Forbes, Twitter and LinkedIn, and visit his website here.

Also on Forbes:

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To track the utility and impact of the Guide on advancing the Scholarship of Engagement, the Office of Engagement may reach out to you in the future. Please contact us directly if you have any questions.

Fortinet harnesses more than a decade of AI innovation and deep threat expertise to empower customers with a cutting-edge GenAI tool that upskills cybersecurity teams

SUNNYVALE, Calif., Dec. 11, 2023 (GLOBE NEWSWIRE) -- Fortinet^® (NASDAQ: FTNT), the global cybersecurity leader driving the convergence of networking and security, today added Fortinet Advisor, a generative AI (GenAI) assistant, to its portfolio of more than 40 AI-powered offerings. AI has served as the backbone of the Fortinet Security Fabric and FortiGuard Labs threat intelligence and security services for more than a decade, and the implementation of GenAI is Fortinet’s latest innovation designed to protect customers and keep business operations online. The initial release of Fortinet Advisor will help support and guide security operations (SecOps) teams so they can investigate and remediate threats faster than ever before.

“Fortinet has pioneered artificial intelligence innovation within cybersecurity, and to date, we’ve delivered more than 40 AI-powered offerings that put the transformative power of this technology into customers’ hands,” said Michael Xie, Founder, President, and Chief Technology Officer at Fortinet. “We’re excited to build on our legacy as a leader in AI cybersecurity innovation with Fortinet Advisor, which combines Fortinet’s vast intelligence network with the benefits of GenAI to increase security team productivity and accelerate threat detection and mitigation.”

Fortinet Advisor Empowers SecOps Teams
Today, Fortinet Advisor is available within FortiSIEM, Fortinet’s security information and event management solution, and FortiSOAR, Fortinet’s security orchestration, automation, and response offering.

Fortinet Security Operations Solutions already enable customers to slash the time needed to identify and contain threats from more than 20 days to less than an hour and condense investigation and remediation timelines from more than 18 hours to 15 minutes or less.¹ By providing contextually aware incident analysis, remediation guidance, and playbook templates, Fortinet Advisor delivers critical information in natural language within seconds so SecOps teams can further reduce the mean time to detect and respond as well as improve their organizations’ overall risk posture.

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Specific benefits of Fortinet Advisor for SecOps teams include:

• Interprets security incidents: Fortinet Advisor rapidly analyzes alerts to generate easy-to-understand incident summaries within seconds, including context and potential impact.

• Builds complex investigation queries: Fortinet Advisor helps security analysts generate productive queries to aid investigations. Analysts enter their desired insights—in natural language—into Fortinet Advisor, which creates precise syntax to return useful results.

• Creates remediation plans: Fortinet Advisor aids in rapid threat response by suggesting threat remediation plans. It can also refine suggested response plans based on real-time analyst feedback.

• Augments playbook creation: Security architects can consult Fortinet Advisor to generate playbook templates, translating processes into actionable plans quickly.

Fortinet Advisor is continuously updated and refined by Fortinet AI and product specialists. Fortinet experts regularly refresh the assistant’s knowledge base with the latest threat information and optimize its interactions and results.

More than a Decade of AI-Powered Threat Research, Prevention, Detection, and Response
Fortinet has been on the bleeding edge of AI innovation for more than a decade, and more than 700,000 customers already benefit from AI-powered offerings, including FortiGuard AI-Powered Security Services, FortiAIOps, FortiEDR, and FortiAnalyzer. The use of AI across the Fortinet Security Fabric aids in zero-day threat detection, helps remediate today’s most sophisticated attacks, and enables IT teams to refine and resolve networking and security issues before they impact the organization.

An Industry-Leading Cybersecurity Platform
The Fortinet Security Operations portfolio is a part of Fortinet’s cybersecurity platform—the Fortinet Security Fabric—and because of this tight integration, organizations can move from a reactive to a proactive security posture and quickly detect and disrupt cyberthreats. Fortinet Security Operations Solutions utilize AI and advanced analytics to identify sophisticated threats early in the kill chain and automate response activity across the Fortinet Security Fabric to speed investigation and remediation.

“GenAI has the power to make security teams smarter, more efficient, and more productive. Fortinet Advisor, which is backed by Fortinet’s long history of AI innovation and deep threat expertise, can help organizations improve business operations and harden themselves against attack, especially for those struggling with the cybersecurity skills gap.” – Jon Oltsik, Distinguished Analyst and Fellow at Enterprise Strategy Group.

Additional Resources

1. ESG, ESG Economic Validation: The Quantified Benefits of Fortinet Security Operations Solutions, August 1, 2023

About Fortinet

Fortinet (NASDAQ: FTNT) is a driving force in the evolution of cybersecurity and the convergence of networking and security. Our mission is to secure people, devices, and data everywhere, and today we deliver cybersecurity everywhere you need it with the most extensive integrated portfolio of over 50 enterprise-grade products. Well over half a million customers trust Fortinet's solutions, which are among the most deployed, most patented, and most validated in the industry. The Fortinet Training Institute, one of the largest and broadest training programs in the industry, is dedicated to making cybersecurity training and new career opportunities available to everyone. FortiGuard Labs, Fortinet’s elite threat intelligence and research organization, develops and utilizes leading-edge machine learning and AI technologies to provide customers with timely and consistently top-rated protection and actionable threat intelligence. Learn more at https://www.fortinet.com, the Fortinet Blog, and FortiGuard Labs.

FTNT-O

Copyright © 2023 Fortinet, Inc. All rights reserved. The symbols ® and ™ denote respectively federally registered trademarks and common law trademarks of Fortinet, Inc., its subsidiaries and affiliates. Fortinet’s trademarks include, but are not limited to, the following: Fortinet, the Fortinet logo, FortiGate, FortiOS, FortiGuard, FortiCare, FortiAnalyzer, FortiManager, FortiASIC, FortiClient, FortiCloud, FortiMail, FortiSandbox, FortiADC, FortiAI, FortiAIOps, FortiAntenna, FortiAP, FortiAPCam, FortiAuthenticator, FortiCache, FortiCall, FortiCam, FortiCamera, FortiCarrier, FortiCASB, FortiCentral, FortiConnect, FortiController, FortiConverter, FortiCWP, FortiDB, FortiDDoS, FortiDeceptor, FortiDeploy, FortiDevSec, FortiEdge, FortiEDR, FortiExplorer, FortiExtender, FortiFirewall, FortiFone, FortiGSLB, FortiHypervisor, FortiInsight, FortiIsolator, FortiLAN, FortiLink, FortiMoM, FortiMonitor, FortiNAC, FortiNDR, FortiPenTest, FortiPhish, FortiPlanner, FortiPolicy, FortiPortal, FortiPresence, FortiProxy, FortiRecon, FortiRecorder, FortiSASE, FortiSDNConnector, FortiSIEM, FortiSMS, FortiSOAR, FortiSwitch, FortiTester, FortiToken, FortiTrust, FortiVoice, FortiWAN, FortiWeb, FortiWiFi, FortiWLC, FortiWLM and FortiXDR. Other trademarks belong to their respective owners. Fortinet has not independently verified statements or certifications herein attributed to third parties and Fortinet does not independently endorse such statements. Notwithstanding anything to the contrary herein, nothing herein constitutes a warranty, guarantee, contract, binding specification or other binding commitment by Fortinet or any indication of intent related to a binding commitment, and performance and other specification information herein may be unique to certain environments.

At its best, cruising might just be the grandest way to travel—watery vistas, rousing breezes, the promise of parts (and ports) unknown, and the pleasure, of course, of seeing the world while having to unpack only once. And there have never been more and better ways to sail, and to more places, than now.

If you’re thinking of the Med for next summer, try it by small ship: The crowds of last summer are here to stay, and this is how to avoid them. Also, the vessels we recommend can anchor in charming little ports where the larger ones cannot venture, and are so sleek the locals won’t hate you for spoiling their view. If the excitement of approaching new and unfamiliar islands is what you’re after (isn’t that at least partly why Odysseus stayed away from home so long?), we know just the ships to take you stylishly around archipelagos in the Caribbean, Indonesia, South Pacific, and Seychelles (yes, it is possible to live on a different island each day). Travel to the poles is the ultimate frontier—and all the rage. We parse the options: Which ships are the best match for your interests, should you go first to the Arctic or the Antarctic, and what’s the difference, anyway? And listen up, all you secret sybarites: there’s a new crop of ultra-luxe vessels whose onboard coddling—think uniform butlers, state-of-the-art spas, celebrity chefs, formal dress dinners, and caviar by the pool—are reason enough to set sail (and proof, as T.S. Eliot once said, that the journey can be as important as the destination). Lastly, river cruising. It may have once had a staid reputation but it’s a beautiful and ancient pastime (think pharaohs on the Nile) and there are new and refurbished river ships on which to sail—on the Nile, of course, but also the Mekong, Ganges, Amazon, Danube, and Chobe, that wildlife-rich tributary of the mighty Zambezi.

There literally are no better ways to watch the world float by.

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If Shackleton could only see how we sail in his footsteps these days...

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