Shares of security-technology provider Fortinet (Nasdaq: FTNT) have been climbing as the company develops a new cloud security strategy. Fortinet has been teaming with service providers to provide private security technology as a cloud service, a developing trend as Network Functions Virtualization (NFV) moves more technology from dedicated hardware to the cloud.
On January 23, Fortinet announced a deal to supply Japanese service provider NTT with cloud security technology. NTT’s service will use Fortinet security software and appliances to deploy basic security measures such as Intrusion Protection System (IPS), URL filtering, and antivirus and antispam tools for emails as a private cloud service for enterprises. Startup software orchestration provider UBIqube is another supplier to NTT in the deal, which we wrote about last week.
NTT says the services will enable on-demand use of basic security functions using a customer portal. It will be deployed as Enterprise Cloud in Japan and WideAngle in Asia, North America, and Europe.
This is the vision that NFV promises, as service providers look to provide more services via the cloud and Web-based customer portals.
Fortinet shares initially got a boost from the NTT deal, though they fell after earnings were reported on January 29. Fortinet reported fourth-quarter revenues of $224 million, up 26.3% from the year-ago quarter, above analysts’ estimates. However, the company reported GAAP earnings per share of $0.04 compared with $0.07 in the year-ago quarter.
The earnings hiccup may be a minor setback in a sustained recovery. Fortinet’s valuation is up about 50% in a year. The stock was trading below $20 in 2013, and it’s now at $29. There’s a lesson here for makers of hardware appliances: Time to get your cloud game on. Some specialized networking technology stocks, such as Fortinet, were hit on the fear that Software Defined Networking (SDN) and NFV would cannibalized their revenues by reducing the need to deploy more hardware. Other companies in a similar situation including F5 Network (Nasdaq: FFIV) in Application Delivery Controllers (ADCs) and Riverbed in WAN optimization (Riverbed recently announced it’s being taken private). But as Fortinet has demonstrated, it’s possible to position your technology as a cloud solution.
In this case, Fortinet teamed with NTT to sell its security technology and appliances as a private cloud service. Fortinet Founder and CEO Ken Xie talked about opportunities in the service provider market on the conference call.
“We are excited about this continued traction here because this high-end customer provides better lifetime value and is beneficial to our business model over time,” said Xie in reference to new deals in the service provider market.
This is just one deal in what’s going to be a huge trend over the next few years, as all manner of service providers and technology companies migrate technology capabilities to the cloud so that they can be sold as either public or private cloud services.
These trends are detailed in our Future of Cloud WAN report. The Rayno Report believes that many specialized enterprise networking services, including firewalls, application load balancing, ADCs, and WAN optmization functions, will be migrated to a cloud model rather than to a dedicated enterprise hardware model.
(Disclosure: At the time of writing, the author had no position in FTNT shares, though he was thinking about it. He also doesn’t own any NTT. He follows his own model portfolio as an investment strategy.)