Fortinet, Inc.
Oct 26, 2017

Fortinet Reports Third Quarter 2017 Financial Results

Revenue and Billings Growth Continues to Surpass Market

Operating Margins Expand

Third Quarter 2017 Highlights

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

"Our large installed base of network security customers offers us a foundation from which to sell our Fortinet Security Fabric, which is the broadest and most integrated security architecture in the industry," said Ken Xie, Founder, Chairman and Chief Executive Officer. "We expect that the expanding cloud security market, and the future of securing critical infrastructure and IoT technologies, will enable Fortinet to continue to grow at multiples of the market over the coming years."

Financial Details

Guidance

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

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

Guidance for non-GAAP financial measures excludes stock-based compensation and amortization of acquired intangible assets. We have not reconciled non-GAAP metrics to GAAP metrics because certain items that impact these measures are uncertain, out of our control and/or cannot be reasonably predicted. Accordingly, a reconciliation of the non-GAAP financial measure guidance to the corresponding GAAP measures is not available without unreasonable effort.

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, October 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 #90458376. 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 November 2, 2017, by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID# 90458376.

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 # 90554546. 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 November 2, 2017 by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID # 90554546.

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. 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, but are not limited to: statements regarding Fortinet continuing to grow at multiples of the market over the coming years, and the fourth quarter and full year 2017 financial guidance. 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 and circumstances may change. 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 and implementation 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, including key personnel and sufficient effective sales representatives to support growth; changes in strategy; risks associated with management of growth; changes in hiring plans or actual hiring and a possible negative impact on growth and margins; product, services and technological challenges and 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 Securities and Exchange Commission (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 U.S. 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 measures 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)
    
 September 30,
 2017
 December 31,
 2016
ASSETS   
CURRENT ASSETS:   
Cash and cash equivalents$905,794  $709,003 
Short-term investments369,961  376,522 
Accounts receivable—net257,999  312,998 
Inventory73,595  106,887 
Prepaid expenses and other current assets43,302  33,306 
Total current assets1,650,651  1,538,716 
LONG-TERM INVESTMENTS247,875  224,983 
DEFERRED TAX ASSETS204,721  182,745 
PROPERTY AND EQUIPMENT—NET239,891  137,249 
OTHER INTANGIBLE ASSETS—NET18,291  24,828 
GOODWILL14,553  14,553 
OTHER ASSETS19,297  16,867 
TOTAL ASSETS$2,395,279  $2,139,941 
LIABILITIES AND STOCKHOLDERS' EQUITY   
CURRENT LIABILITIES:   
Accounts payable$44,543  $56,732 
Accrued liabilities40,439  35,640  
Accrued payroll and compensation75,482  78,138 
Income taxes payable15,862  13,588 
Deferred revenue734,313  645,342 
Total current liabilities910,639  829,440 
DEFERRED REVENUE484,644  390,007 
INCOME TAX LIABILITIES87,993  68,551 
OTHER LIABILITIES9,778  14,262 
Total liabilities1,493,054  1,302,260 
COMMITMENTS AND CONTINGENCIES   
STOCKHOLDERS' EQUITY:   
Common stock175  173 
Additional paid-in capital912,053  800,653 
Accumulated other comprehensive loss(416) (765)
Retained earnings (deficit)(9,587) 37,620 
Total stockholders' equity902,225  837,681 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$2,395,279  $2,139,941 


 
FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
    
 Three Months Ended Nine Months Ended
 September 30,
 2017
 September 30,
 2016
 September 30,
 2017
 September 30,
 2016
REVENUE:       
Product $137,095  $127,972  $415,053  $389,185 
Service237,122  188,674  663,209  523,428 
Total revenue374,217  316,646  1,078,262  912,613 
COST OF REVENUE:       
Product 158,106  50,267   174,190  152,368 
Service 135,543  34,532  105,675  94,578 
Total cost of revenue93,649  84,799  279,865  246,946 
GROSS PROFIT:       
Product78,989  77,705  240,863  236,817 
Service201,579  154,142  557,534  428,850 
Total gross profit280,568  231,847  798,397   665,667 
OPERATING EXPENSES:       
Research and development 153,486   47,239  155,840  137,495 
Sales and marketing 1172,361  154,831  509,098  463,628 
General and administrative 121,025  22,006  65,513  63,629 
Restructuring charges  2,283  340  3,164 
Total operating expenses246,872  226,359  730,791  667,916 
OPERATING INCOME (LOSS)33,696  5,488  67,606  (2,249)
INTEREST INCOME3,866  1,888  9,421  5,339 
OTHER INCOME (EXPENSE)—NET344  (787) 1,889  (3,449)
INCOME (LOSS) BEFORE INCOME TAXES37,906  6,589  78,916   (359)
PROVISION FOR (BENEFIT FROM) INCOME TAXES11,296  298  18,556  (7,380)
NET INCOME$26,610  $6,291  $60,360  $7,021 
Net income per share:       
Basic$0.15  $0.04  $0.34  $0.04 
Diluted$0.15  $0.04  $0.34  $0.04 
Weighted-average shares outstanding:       
Basic175,519  173,335   175,253  172,212 
Diluted178,973  177,938  178,987  176,046 
         
1 Includes stock-based compensation as follows:       
Cost of product revenue$314   $309  $1,039  $887 
Cost of service revenue2,371  2,238  7,154  6,495 
Research and development7,976  7,648  24,127  22,249 
Sales and marketing19,609  17,378  58,380  50,183 
General and administrative4,037  3,520  12,029  10,528 
 $34,307  $31,093  $102,729  $90,342 


 
FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
     
 Three Months Ended Nine Months Ended
 September 30,
 2017
  September 30,
 2016
 September 30,
 2017
 September 30,
 2016
Net income$26,610  $6,291  $60,360  $7,021 
Other comprehensive income (loss):       
Change in unrealized gains (losses) on investments172  (879) 506  1,670 
Tax provision (benefit) related to change in unrealized
gains (losses) on investments
65  (308) 157  584 
Other comprehensive income (loss)107  (571)  349  1,086 
Comprehensive income$26,717  $5,720  $60,709  $8,107 


 
FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
  
 Nine Months Ended
 September 30,
 2017
 September 30,
 2016
CASH FLOWS FROM OPERATING ACTIVITIES:   
Net income$60,360  $7,021 
Adjustments to reconcile net income to net cash provided by operating activities:   
Depreciation and amortization41,208  34,896 
Amortization of investment premiums2,125  3,828 
Stock-based compensation102,729  90,342 
Other non-cash items—net3,179  4,846 
Changes in operating assets and liabilities:   
Accounts receivable—net51,447  12,788 
Inventory17,687  (24,555)
Deferred tax assets(22,133) (35,005)
Prepaid expenses and other current assets(9,599) 4,301 
Other assets(360) (2,595)
Accounts payable(16,537) (1,584)
Accrued liabilities8,052  598 
Accrued payroll and compensation(3,531) 3,253 
Other liabilities(3,830 ) (3,119)
Deferred revenue184,350  142,867 
Income taxes payable21,716  6,789 
Net cash provided by operating activities436,863  244,671 
CASH FLOWS FROM INVESTING ACTIVITIES:   
Purchases of investments(359,569) (370,573)
Sales of investments9,995  21,805 
Maturities of investments329,132  344,959 
Purchases of property and equipment(121,641) (50,319)
Payments made in connection with business acquisition, net of cash acquired  (22,087)
Net cash used in investing activities(142,083)  (76,215)
CASH FLOWS FROM FINANCING ACTIVITIES:   
Proceeds from issuance of common stock61,836  42,292 
Taxes paid related to net share settlement of equity awards(35,869) (29,886)
Repurchase of common stock(123,956) (75,000)
Payments of debt assumed in connection with business acquisition  (1,626)
Net cash used in financing activities(97,989)  (64,220)
NET INCREASE IN CASH AND CASH EQUIVALENTS196,791  104,236 
CASH AND CASH EQUIVALENTS—Beginning of period709,003  543,277 
CASH AND CASH EQUIVALENTS—End of period$905,794  $647,513 


 
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
 September 30,
 2017
 September 30,
 2016
Net cash provided by operating activities$162,343  $76,139 
Less purchases of property and equipment(21,753) (5,920)
Free cash flow$140,590  $70,219 
Net cash used in investing activities$(28,914) $(6,798)
Net cash used in financing activities$(80,772) $(18,208)


 
Reconciliation of GAAP operating income to Non-GAAP operating income, operating margin, net income and diluted net income per share
    
 Three Months Ended September 30, 2017 Three Months Ended September 30, 2016
 GAAP
Results
 Adjustments Non-GAAP
Results
 GAAP Results Adjustments Non-GAAP
Results
Operating income$33,696  $36,344 (a)$70,040  $5,488  $40,447 (b)$45,935 
Operating margin9%   19% 2%   15%
Adjustments:           
Stock-based
compensation
  34,307      31,093   
Amortization of
acquired intangible
assets
  2,037      2,839   
Restructuring charges        2,283   
ERP-related expenses        4,060   
Inventory fair value
adjustment amortization
        172   
Tax adjustment  (12,464)(c)    (14,555)(c) 
Net income$26,610  $23,880  $50,490  $ 6,291  $25,892  $32,183 
Diluted net income per
share
$0.15    $0.28  $0.04    $0.18 
Shares used in diluted net
income per share
calculations
178,973    178,973  177,938    177,938 

(a) To exclude $34.3 million of stock-based compensation and $2.0 million of amortization of acquired intangible assets in the three months ended September 30, 2017.
(b) To exclude $31.1 million of stock-based compensation, $2.8 million of amortization of acquired intangible assets, $2.3 million of restructuring charges, $4.1 million of ERP-related expenses, and $0.2 million of inventory fair value adjustment amortization recorded pursuant to our business acquisition in the three months ended September 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.

 
Billings Reconciliation
  
 Three Months Ended
 September 30,
 2017
 September 30,
 2016
Total revenue$374,217  $316,646 
Add change in deferred revenue57,486  30,811 
Total billings$431,703  $347,457 

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

Primary Logo

Source: Fortinet, Inc.

News Provided by Acquire Media