Fortinet, Inc.
Jul 26, 2017

Fortinet Reports Second Quarter 2017 Financial Results

Revenue and Billings Growth Continue to Surpass Market While Operating Margins Expand

Second Quarter 2017 Highlights

SUNNYVALE, Calif., July 26, 2017 (GLOBE NEWSWIRE) -- Fortinet® (NASDAQ:FTNT), a global leader in high performance cyber security solutions, today announced financial results for the second quarter ended June 30, 2017.

"Fortinet continues to exceed market growth rates, while delivering well against our margin improvement goals," said Ken Xie, Chairman and Chief Executive Officer. "The strength of the Fortinet Security Fabric positions us well to provide industry-leading protection for our customers against the aggressive threats that they face now and in the future wherever their assets and data are deployed: on premise or in the cloud."

In other highlights, Fortinet was recognized as a Leader in the July 2017 Gartner Magic Quadrant for Enterprise Networks Firewalls, and retained its status as a Leader in the June 2017 Magic Quadrant for Unified Threat Management (SMB Multifunction Firewalls). IDC again named Fortinet the unit market share leader for security appliances shipped.

[Note: Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advise technology users to select only those vendors with the highest ratings or other designation. Gartner research publications consist of the opinions of Gartner's research organization and should not be construed as statements of fact. Gartner disclaims all warranties, expressed or implied, with respect to this research, including any warranties of merchantability or fitness for a particular purpose. Gartner Peer Insights reviews constitute the subjective opinions of individual end-users based on their own experiences, and do not represent the views of Gartner or its affiliates.]

Financial Details

Guidance

Fortinet offered the following guidance for the third quarter of 2017:

Fortinet also offered the following update to its guidance for the full year 2017:

1 A reconciliation of GAAP to non-GAAP measures has been provided in the financial statement tables included in this press release. An explanation of these measures is also included below under the heading "Non-GAAP Financial Measures."

Conference Call Details
Fortinet will host a conference call today, July 26, 2017, at 1:30 p.m. Pacific Time (4:30 p.m. Eastern Time) to discuss its financial results. To access this call, dial (877) 303-6913 (domestic) or (224) 357-2188 (international) with conference ID #47812648. A live webcast of the conference call and supplemental slides will be accessible from the Investor Relations page of Fortinet's website at http://investor.fortinet.com and a replay will be archived and accessible at http://investor.fortinet.com/events.cfm. A replay of this conference call can also be accessed through August 2, 2017, by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID# 47812648.

Following Fortinet's financial results conference call, the Company will host an additional question-and-answer session at 3:30 p.m. Pacific Time (6:30 p.m. Eastern Time) to provide an opportunity for financial analysts and investors to ask more detailed questions. To access this call, dial (877) 303-6913 (domestic) or (224) 357-2188 (international) with conference ID # 47812844. This follow-up call will be webcast live and accessible at http://investor.fortinet.com. A replay will be archived and available after the call at http://investor.fortinet.com/events.cfm. A replay of this conference call will also be available through August 2, 2017 by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID # 47812844.

About Fortinet (www.fortinet.com)
Fortinet (NASDAQ:FTNT) secures the largest enterprise, service provider and government organizations around the world. Fortinet empowers its customers with intelligent, seamless protection across the expanding attack surface and the power to take on ever-increasing performance requirements of the borderless network -- today and into the future. Only the Fortinet Security Fabric architecture can deliver security without compromise to address the most critical security challenges, whether in networked, application, cloud or mobile environments. More than 320,000 customers worldwide trust Fortinet to protect their businesses. Learn more at http://www.fortinet.com, the Fortinet Blog, or FortiGuard Labs.

Copyright © 2017 Fortinet, Inc. All rights reserved. The symbols ® and ™ denote respectively federally registered trademarks and unregistered trademarks of Fortinet, Inc., its subsidiaries and affiliates. Fortinet's trademarks include, but are not limited to, the following: Fortinet, FortiGate, FortiGuard, FortiManager, FortiMail, FortiClient, FortiCloud, FortiCare, FortiAnalyzer, FortiReporter, FortiOS, FortiASIC, FortiWiFi, FortiSwitch, FortiVoIP, FortiBIOS, FortiLog, FortiResponse, FortiCarrier, FortiSIEM, FortiAP, FortiDB, FortiVoice, FortiWeb and FortiCASB. Other trademarks belong to their respective owners.

FTNT-F

Forward-looking Statements
This press release contains forward-looking statements that involve risks and uncertainties. These forward-looking statements include statements regarding our positioning for market share gains and future growth and margin improvement. Although we attempt to be accurate in making forward-looking statements, it is possible that future circumstances might differ from the assumptions on which such statements are based. Important factors that could cause results to differ materially from the statements herein include the following: general economic risks; global economic conditions; regional and country-specific economic challenges and conditions and foreign currency risks; increasing competitiveness in the security market; the dynamic nature of the security market; specific economic risks worldwide and in different geographies, and among different customer segments; uncertainty regarding increased business and renewals from existing customers; uncertainties around continued success in sales growth and market share gains; longer sales cycles, particularly for larger enterprise customers; failure to convert sales pipeline into final sales; risks associated with successful implementation of multiple integrated software products and other product functionality risks; sales and marketing execution risks; our ability to continue to improve operating margins; execution risks around new product development and introductions and innovation; risks of slowing growth in the security market in general; litigation, disputes and investigations and the potential cost, distraction and damage to sales and reputation caused thereby; market acceptance of new products and services; the ability to attract and retain personnel; changes in strategy; risks associated with management of growth; lengthy sales and implementation cycles, particularly in larger organizations; changes in hiring plans or actual hiring and a possible negative impact on growth and margins; technological changes that make our products and services less competitive; risks associated with the adoption of, and demand for, our products and services in general and by specific customer segments; pricing pressure; risks related to integrating acquisitions; and the other risk factors set forth from time to time in our most recent Annual Report on Form 10-K, our most recent Quarterly Report on Form 10-Q and our other filings with the SEC, copies of which are available free of charge at the SEC's website at www.sec.gov or upon request from our investor relations department. All forward-looking statements herein reflect our opinions only as of the date of this release, and we undertake no obligation, and expressly disclaim any obligation, to update forward-looking statements herein in light of new information or future events.

Non-GAAP Financial Measures
We have provided in this release financial information that has not been prepared in accordance with Generally Accepted Accounting Principles (GAAP). These non-GAAP financial and liquidity measures are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similar measures presented by other companies. We use these non-GAAP financial measures internally in analyzing our financial results and believe they are useful to investors, as a supplement to GAAP measures, in evaluating our ongoing operational performance. We believe that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial results with peer companies, many of which present similar non-GAAP financial measures to investors.

Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures provided in the financial statement tables below.

Billings (Non-GAAP). We define billings as revenue recognized in accordance with GAAP plus the change in deferred revenue from the beginning to the end of the period less any deferred revenue balances acquired from business combination(s) during the period. We consider billings to be a useful metric for management and investors because billings drive future revenue, which is an important indicator of the health and viability of our business. There are a number of limitations related to the use of billings instead of GAAP revenue. First, billings include amounts that have not yet been recognized as revenue and are impacted by the term of security and support agreements. Second, we may calculate billings in a manner that is different from peer companies that report similar financial measures. Management accounts for these limitations by providing specific information regarding GAAP revenue and evaluating billings together with GAAP revenue.

Free cash flow (Non-GAAP). We define free cash flow as net cash provided by operating activities minus capital expenditures such as purchases of real estate and other property and equipment. We believe free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business that, after capital expenditures, can be used for strategic opportunities, including investing in our business, making strategic acquisitions, repurchasing outstanding common stock, and strengthening the balance sheet. However, free cash flow is not intended to represent our residual cash flow available for discretionary expenditures, since we may have other non-discretionary expenditures that are not deducted from the measure. A limitation of using free cash flow rather than the GAAP measure of net cash provided by operating activities is that free cash flow does not represent the total increase or decrease in the cash, cash equivalents and investments balance for the period because it excludes cash provided by or used for other investing and financing activities. Management accounts for this limitation by providing information about our capital expenditures and other investing and financing activities on the face of the cash flow statement and under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" in our most recent Quarterly Report on Form 10-Q and Annual Report on Form 10-K and by presenting cash flows from investing and financing activities in our reconciliation of free cash flows. In addition, it is important to note that other companies, including companies in our industry, may not use free cash flow, may calculate free cash flow in a different manner than we do or may use other financial measure to evaluate their performance, all of which could reduce the usefulness of free cash flows as a comparative measure.

Non-GAAP operating income and operating margin. We define non-GAAP operating income as operating income or loss plus stock-based compensation, business acquisition-related charges, purchase accounting adjustments, impairment and amortization of acquired intangible assets, restructuring charges, expenses associated with the implementation of a new Enterprise Resource Planning (ERP) system, litigation settlement expenses and, when applicable, other significant non-recurring items in a given quarter. Non-GAAP operating margin is defined as non-GAAP operating income divided by GAAP revenue. We consider these non-GAAP financial measures to be useful metrics for management and investors because they exclude the items noted above so that our management and investors can compare our recurring core business operating results over multiple periods. There are a number of limitations related to the use of non-GAAP operating income instead of operating income or loss calculated in accordance with GAAP. First, non-GAAP operating income excludes the items noted above. Second, the components of the costs that we exclude from our calculation of non-GAAP operating income may differ from the components that peer companies exclude when they report their non-GAAP results of operations. Management accounts for these limitations by providing specific information regarding the GAAP amounts excluded from non-GAAP operating income and evaluating non-GAAP operating income together with operating income calculated in accordance with GAAP.

Non-GAAP net income and diluted net income per share. We define non-GAAP net income as net income plus the items noted above under non-GAAP operating income and operating margin, including a tax adjustment to achieve our effective tax rate on a non-GAAP basis, which often differs from the GAAP effective tax rate. We define non-GAAP diluted net income per share as non-GAAP net income divided by the non-GAAP diluted weighted-average shares outstanding. We consider these non-GAAP financial measures to be useful metrics for management and investors for the same reasons that we use non-GAAP operating income and non-GAAP operating margin. However, in order to provide a more complete picture of our recurring core business operating results, we include in non-GAAP net income and non-GAAP diluted net income per share, the tax adjustment required resulting in an effective tax rate on a non-GAAP basis, which often differs from the GAAP tax rate. We believe the non-GAAP effective tax rates we use are reasonable estimates of normalized tax rates for our current and prior fiscal years under our global operating structure. The same limitations described above regarding our use of non-GAAP operating income and non-GAAP operating margin apply to our use of non-GAAP net income and non-GAAP diluted net income per share. We account for these limitations by providing specific information regarding the GAAP amounts excluded from non-GAAP net income and non-GAAP diluted net income per share and evaluating non-GAAP net income and non-GAAP diluted net income per share together with net income and diluted net income per share calculated in accordance with GAAP.


FORTINET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
 
 June 30,
 2017
 December 31,
 2016
ASSETS   
CURRENT ASSETS:   
Cash and cash equivalents$853,137  $709,003 
Short-term investments354,187  376,522 
Accounts receivable—net274,476  312,998 
Inventory86,439  106,887 
Prepaid expenses and other current assets36,395  33,306 
Total current assets1,604,634  1,538,716 
LONG-TERM INVESTMENTS257,622  224,983 
DEFERRED TAX ASSETS207,029  182,745 
PROPERTY AND EQUIPMENT—NET238,513  137,249 
OTHER INTANGIBLE ASSETS—NET20,328  24,828 
GOODWILL14,553  14,553  
OTHER ASSETS18,012  16,867 
TOTAL ASSETS$2,360,691  $2,139,941 
LIABILITIES AND STOCKHOLDERS' EQUITY   
CURRENT LIABILITIES:   
Accounts payable$42,171  $56,732 
Accrued liabilities41,185  35,640 
Accrued payroll and compensation 80,307  78,138 
Income taxes payable15,184  13,588 
Deferred revenue706,672  645,342 
Total current liabilities885,519  829,440 
DEFERRED REVENUE 454,799  390,007 
INCOME TAX LIABILITIES81,718  68,551 
OTHER LIABILITIES16,516   14,262 
Total liabilities1,438,552  1,302,260 
STOCKHOLDERS' EQUITY:   
Common stock175  173 
Additional paid-in capital880,142  800,653 
Accumulated other comprehensive loss(523) (765)
Retained earnings42,345  37,620 
Total stockholders' equity922,139  837,681 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$2,360,691  $2,139,941 


FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
 
 Three Months Ended Six Months Ended
 June 30,
 2017
 June 30,
 2016
 June 30,
 2017
 June 30,
 2016
REVENUE:        
Product$142,705  $136,641  $277,958  $261,213 
Service220,764  174,750  426,087  334,754 
Total revenue363,469  311,391  704,045  595,967 
COST OF REVENUE:       
Product 160,787  52,788  116,084  102,101 
Service 134,865  31,715  70,132  60,046 
Total cost of revenue95,652  84,503  186,216  162,147 
GROSS PROFIT:       
Product81,918  83,853   161,874  159,112 
Service185,899  143,035  355,955  274,708 
Total gross profit267,817  226,888  517,829  433,820 
OPERATING EXPENSES:       
Research and development 151,159  45,502  102,354  90,256 
Sales and marketing 1166,337  162,694  336,737  308,797 
General and administrative 121,911  22,184  44,488  41,623 
Restructuring charges(90) 553  340  881 
Total operating expenses239,317  230,933  483,919  441,557 
OPERATING INCOME (LOSS)28,500  (4,045) 33,910  (7,737)
INTEREST INCOME3,163  1,705  5,555  3,451 
OTHER INCOME (EXPENSE)—NET1,243  (1,350) 1,545  (2,662)
INCOME (LOSS) BEFORE INCOME TAXES32,906  (3,690) 41,010  (6,948)
PROVISION FOR (BENEFIT FROM) INCOME TAXES9,873  (2,302) 7,260  (7,678)
NET INCOME (LOSS)$23,033   $(1,388) $33,750  $730 
Net income (loss) per share:       
Basic$0.13  $(0.01) $0.19  $ 
Diluted$0.13  $(0.01) $0.19  $ 
Weighted-average shares outstanding:       
Basic175,741  172,075  175,118  171,910 
Diluted179,701  172,075  178,993  175,360 
        
1 Includes stock-based compensation as follows:       
Cost of product revenue$383  $298  $725  $578 
Cost of service revenue2,473  2,123  4,783  4,257 
Research and development8,253  7,458  16,151  14,601 
Sales and marketing19,745  16,990  38,771  32,805 
General and administrative4,237  3,478  7,992  7,008 
 $35,091  $30,347  $68,422  $59,249 


FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in thousands)
 
 Three Months Ended Six Months Ended
 June 30,
 2017
 June 30,
 2016
 June 30,
 2017
 June 30,
 2016
Net income (loss)$23,033  $(1,388) $33,750  $730 
Other comprehensive income:       
Change in unrealized gains (losses) on investments(91) 662  334  2,549 
Tax provision (benefit) related to change in unrealized gains (losses) on investments(57) 232  92  892 
Other comprehensive income (loss)(34) 430  242  1,657 
Comprehensive income (loss)$22,999  $(958) $33,992  $2,387 


FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
 Six Months Ended
 June 30,
 2017
 June 30,
 2016
CASH FLOWS FROM OPERATING ACTIVITIES:   
Net income$33,750  $730 
Adjustments to reconcile net income to net cash provided by operating activities:    
     Depreciation and amortization27,492  21,841 
     Amortization of investment premiums1,447  2,794 
     Stock-based compensation68,422  59,249 
     Other non-cash items—net1,705  1,192 
     Changes in operating assets and liabilities:   
          Accounts receivable—net37,902  2,022 
          Inventory9,752   (8,019)
          Deferred tax assets(24,376) (27,120)
          Prepaid expenses and other current assets(3,223) 2,442 
          Other assets722  (2,409)
         Accounts payable(19,880) (130)
         Accrued liabilities1,755  (6,426)
         Accrued payroll and compensation1,565  8,679 
         Other liabilities(2,677) (2,858)
         Deferred revenue125,402  111,082 
         Income taxes payable14,762  5,463 
               Net cash provided by operating activities274,520  168,532 
CASH FLOWS FROM INVESTING ACTIVITIES:   
Purchases of investments(270,463) (230,855)
Sales of investments9,995  7,366 
Maturities of investments247,187  219,131 
Purchases of property and equipment(99,888) (44,399)
Payments made in connection with business acquisition, net of cash acquired  (20,660)
               Net cash used in investing activities(113,169) (69,417)
CASH FLOWS FROM FINANCING ACTIVITIES:   
Proceeds from issuance of common stock41,832  22,972 
Taxes paid related to net share settlement of equity awards(25,895) (17,358)
Repurchase and retirement of common stock(33,154) (50,000)
Payments of debt assumed in connection with business acquisition  (1,626)
               Net cash used in financing activities(17,217) (46,012)
NET INCREASE IN CASH AND CASH EQUIVALENTS144,134  53,103 
CASH AND CASH EQUIVALENTS—Beginning of period709,003  543,277 
CASH AND CASH EQUIVALENTS—End of period$853,137  $596,380 


Reconciliations of non-GAAP results of operations measures to the nearest comparable GAAP measures
(Unaudited, in thousands, except per share amounts)
 
Reconciliation of net cash provided by operating activities to free cash flow
 
 Three Months Ended
 June 30,
 2017
 June 30,
 2016
Net cash provided by operating activities$144,771  $67,941 
Less purchases of property and equipment(86,362) (14,443)
Free cash flow$58,409  $ 53,498 
Net cash used in investing activities$(81,844) $(35,213)
Net cash used in financing activities$(33,039) $(4,356)


Reconciliation of GAAP operating income or loss to Non-GAAP operating income, operating margin, net income and diluted net income per share
 
 Three Months Ended June 30, 2017 Three Months Ended June 30, 2016
 GAAP Results Adjustments Non-GAAP Results GAAP Results Adjustments Non-GAAP Results
Operating income (loss)$28,500  $37,208 (a) $65,708  $(4,045) $40,016 (b)$35,971 
Operating margin8%   18% -1%   12%
Adjustments:           
Stock-based compensation  35,091      30,347   
Amortization of acquired intangible assets  2,207      2,269   
Restructuring charges  (90)      553   
ERP-related expenses        6,316   
Acquisition-related charges        254   
Inventory fair value adjustment amortization        277   
Tax adjustment  (12,563)(c)    (14,653)(c) 
Net income (loss)$23,033  $24,645  $47,678  $(1,388) $25,363  $23,975 
Diluted net income (loss) per share$0.13    $0.27  $(0.01)   $0.14 
Shares used in diluted net income (loss) per share calculations179,701    179,701  172,075    176,298 

(a) To exclude $35.1 million of stock-based compensation, $2.2 million of amortization of acquired intangible assets, and $(0.1) million of restructuring charges in the three months ended June 30, 2017.
(b) To exclude $30.3 million of stock-based compensation, $2.3 million of amortization of acquired intangible assets, $0.6 million of restructuring charges, $6.3 million of ERP-related expenses, $0.3 million of acquisition-related charges, and $0.3 million of inventory fair value adjustment amortization recorded pursuant to our business acquisition in the three months ended June 30, 2016.
(c)  Non-GAAP financial information is adjusted to achieve an overall 32% percent and 33% percent effective tax rate in 2017 and 2016, respectively, on a non-GAAP basis, which differs from the GAAP effective tax rate.


Reconciliation of diluted weighted average shares outstanding used in the calculation of GAAP and non-GAAP earnings per share
 
  Three Months Ended
  June 30, 2017 June 30, 2016
Shares used in diluted net income (loss) per share calculations - GAAP 179,701  172,075 
Adjustment for diluted weighted average shares outstanding (a)  4,223 
Shares used in diluted net income per share calculations - Non-GAAP 179,701   176,298 

(a) GAAP diluted weighted average shares outstanding differs from non-GAAP diluted weighted average shares outstanding in periods when we have a GAAP net loss and a non-GAAP net income. The adjustment for diluted weighted average shares outstanding represents the dilutive effect of employee equity incentive plan awards and is calculated by applying the treasury stock method.


Billings Reconciliation
  
 Three Months Ended
 
 June 30,
 2017
 June 30,
 2016
Total revenue$363,469  $311,391
Add change in deferred revenue63,420  66,793 
Less deferred revenue balance acquired in business acquisition  (4,400)
Total billings$426,889  $373,784 


Investor Contact:



Kelly Blough

Fortinet, Inc.

408-235-7700 x 81612

kblough@fortinet.com



Media Contact:



Sandra Wheatley

Fortinet, Inc.

408-391-9408

swheatley@fortinet.com

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Source: Fortinet, Inc.

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