Fortinet, Inc.
Oct 24, 2011

Fortinet Reports Record Financial Results

SUNNYVALE, CA -- (MARKET WIRE) -- 10/24/11 -- Fortinet® (NASDAQ: FTNT)

Fortinet® (NASDAQ: FTNT) -- a leading network security provider and the worldwide leader in unified threat management (UTM) solutions -- today announced financial results for the third quarter ended September 30, 2011.

Financial Highlights for the Third Quarter of 2011

(1) Effective January 1, 2011, we prospectively adopted the Financial Accounting Standards Board's new accounting standards related to software revenue recognition for applicable transactions originating or materially modified after December 31, 2010.

(2) Includes the impact of a $2.6 million sale of previously-acquired patents during the quarter.

(3) A reconciliation of GAAP to non-GAAP financial 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."

(4) Effective June 1, 2011, we completed a two-for-one stock split of our outstanding shares of common stock effected in the form of a stock dividend. All prior share and per share amounts in this release have been retroactively adjusted so the stock split is reflected for all periods presented.

Management Commentary:
Ken Xie, founder, president and chief executive officer of Fortinet, stated: "We are very pleased with our performance during the third quarter, as demand in the UTM market combined with the successful implementation of our global go-to-market sales strategy continued to drive growth and market share gains. A strong network security product portfolio and the execution of our growth plan enabled us to continue to win business with service providers, and gain further traction with large enterprise deployments across all of our geographies. In addition, we demonstrated the value of our products by winning a landmark enterprise deal in the United States, which represents the largest contract in the company's history. Our high performance UTM solutions continue to differentiate us in the marketplace and fuel our growth."

Ken Goldman, chief financial officer of Fortinet, stated: "We had record financial performance during the third quarter -- exceeding expectations from a revenue, billings, profitability and cash flow perspective. Product revenue growth was strong, which we view as a leading indicator for our business. In addition, we continued to achieve improvements in productivity levels as we remain focused on leveraging our investments in R&D and implementing our global sales strategy throughout the organization. The strength of our balance sheet and liquidity is demonstrated by our exceeding $500 million in cash and investments with no debt."

Conference Call Details
Fortinet will host a conference call today, October 24, 2011, 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 # 17263883. A live webcast of the conference call and supplemental slides will be accessible from the Investor Relations page of our 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 7, 2011, by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID# 17263883.

Following our earnings conference call, we 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 to ask more detailed product and financial questions. To access this call, dial (877) 303-6913 (domestic) or (224) 357-2188 (international) with conference ID # 17263883. This follow-up call will be webcast live and accessible 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 7, 2011, by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID # 17263883.

About Fortinet (www.fortinet.com)
Fortinet (NASDAQ: FTNT) is a worldwide provider of network security appliances and the market leader in unified threat management (UTM). Our products and subscription services provide broad, integrated and high-performance protection against dynamic security threats while simplifying the IT security infrastructure. Our customers include enterprises, service providers and government entities worldwide, including the majority of the 2009 Fortune Global 100. Fortinet's flagship FortiGate product delivers ASIC-accelerated performance and integrates multiple layers of security designed to help protect against application and network threats. Fortinet's broad product line goes beyond UTM to help secure the extended enterprise -- from endpoints, to the perimeter and the core, including databases and applications. Fortinet is headquartered in Sunnyvale, Calif., with offices around the world.

Copyright © 2011 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, FortiCare, FortiAnalyzer, FortiReporter, FortiOS, FortiASIC, FortiWiFi, FortiSwitch, FortiVoIP, FortiBIOS, FortiLog, FortiResponse, FortiCarrier, FortiScan, FortiAP, FortiDB and FortiWeb. 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.

FTNT-F

Forward-looking Statements
This press release contains forward-looking statements that involve risks and uncertainties. These forward-looking statements include statements regarding the momentum in our business, continued differentiation and growth based on our high performance UTM solutions, our pipeline of business, improving trends in EMEA, and our fourth-quarter product launches. 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; specific economic risks 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; failure to convert sales pipeline into final sales; risks associated with successful implementation of multiple integrated software products and other product functionality risks; execution risks around new product introductions and innovation; 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; technological changes that make our products and services less competitive; risks associated with the adoption of, and demand for, the UTM model in general and by specific customer segments; and the other risk factors set forth from time to time in our 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 GAAP. 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 other companies in our industry, 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 below. As previously mentioned, a reconciliation of our non-GAAP financial measures to their most directly comparable GAAP measures has been provided in the financial statement tables included below in this press release.

Billings. We define billings as revenue recognized plus the change in deferred revenue from the beginning to the end of the period. We consider billings to be a useful metric for management and investors because billings drive deferred revenue, which is an important indicator of the health and visibility of our business, and has historically represented a majority of the quarterly revenue that we recognize. There are a number of limitations related to the use of billings versus revenue calculated in accordance with GAAP. First, billings include amounts that have not yet been recognized as revenue. Second, we may calculate billings in a manner that is different from peer companies that report similar financial measures. Management compensates for these limitations by providing specific information regarding GAAP revenue and evaluating billings together with revenues calculated in accordance with GAAP.

Free Cash Flow. We define free cash flow as net cash provided by operating activities minus capital expenditures. We consider 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 the acquisition of property and equipment, can be used for strategic opportunities, including investing in our business, making strategic acquisitions, and strengthening the balance sheet. Analysis of free cash flow also facilitates management's comparisons of our operating results to competitors' operating results. A limitation of using free cash flow versus the GAAP measure of net cash provided by operating activities as a means for evaluating Fortinet is that free cash flow does not represent the total increase or decrease in the cash balance from operations for the period because it excludes cash used for capital expenditures during the period. Management compensates for this limitation by providing information about our capital expenditures 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 Quarterly Report on Form 10-Q and Annual Report on Form 10-K. We have computed free cash flow using the same consistent method from quarter to quarter and year to year.

Non-GAAP operating income and operating margin. We define non-GAAP operating income as operating income plus stock-based compensation reduced by the income from payments we received from a patent settlement. Non-GAAP operating margin is defined as non-GAAP operating income divided by revenue. We consider these non-GAAP financial measures to be useful metrics for management and investors because they exclude the effect of stock-based compensation expense and patent settlement related income 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 versus operating income calculated in accordance with GAAP. First, non-GAAP operating income excludes stock-based compensation expense. Stock-based compensation has been and will continue to be for the foreseeable future a significant recurring expense in our business. Second, stock-based compensation is an important part of our employees' compensation and impacts their performance. Third, the components of the costs that we exclude in our calculation of non-GAAP operating income may differ from the components that our peer companies exclude when they report their non-GAAP results of operations. Management compensates 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 EPS. We define non-GAAP net income as net income plus stock-based compensation expense reduced by the income from payments we received from a patent settlement, less the related tax effects for both periods presented. We define non-GAAP EPS as non-GAAP net income divided by the weighted-average shares outstanding, on a fully-diluted basis. We consider these non-GAAP financial measures to be a useful metric 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 complete picture of our recurring core business operating results, we exclude from non-GAAP net income and non-GAAP EPS the tax effects associated with stock-based compensation and the patent settlement. We used a 33 percent effective tax rate to calculate non-GAAP net income for the third quarter of 2011. We used a 35 percent effective tax rate to calculate non-GAAP net income for the third quarter of 2010. We believe these effective tax rates are reasonable estimates of long-term normalized tax rates 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 EPS. We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from non-GAAP net income and non-GAAP EPS and evaluating non-GAAP net income and non-GAAP EPS together with net income and EPS calculated in accordance with GAAP.






                               FORTINET, INC.



                   CONDENSED CONSOLIDATED BALANCE SHEETS

                               (in thousands)

                                (unaudited)



                                              September 30,    December 31,

                    ASSETS                         2011            2010

                                              -------------   -------------



CURRENT ASSETS:

  Cash and cash equivalents                   $      66,630   $      66,859

  Short-term investments                            322,536         246,651

  Accounts receivable, net of allowance for

   doubtful accounts of $180 and

  $303, respectively                                 75,835          72,336

  Inventory                                          12,968          13,517

  Deferred tax asset                                 14,330           8,158

  Prepaid expenses and other current assets           9,258           8,849

  Deferred cost of revenues                           2,369           3,788

                                              -------------   -------------



    Total current assets                            503,926         420,158



PROPERTY AND EQUIPMENT -- Net                         7,485           7,056



DEFERRED TAX ASSET -- Non-current                    37,443          37,443



DEFERRED COST OF REVENUES                             3,775           5,543





LONG-TERM INVESTMENTS                               113,801          73,950



OTHER ASSETS                                          4,557           1,272

                                              -------------   -------------



TOTAL ASSETS                                  $     670,987   $     545,422

                                              =============   =============



     LIABILITIES AND STOCKHOLDERS' EQUITY



CURRENT LIABILITIES:

  Accounts payable                            $      15,342   $      12,761

  Accrued liabilities                                22,286          16,303

  Accrued payroll and compensation                   21,112          19,670

  Deferred revenue                                  192,927         169,648

                                              -------------   -------------



    Total current liabilities                       251,667         218,382



DEFERRED REVENUE -- Non-current                      82,199          82,983

OTHER NON-CURRENT LIABILITIES                        20,254          11,603

                                              -------------   -------------



    Total liabilities                               354,120         312,968

                                              -------------   -------------



STOCKHOLDERS' EQUITY:

  Common stock                                          155             150

  Additional paid-in-capital                        292,440         251,845

  Treasury stock -- common                           (2,995)         (2,995)

  Accumulated other comprehensive income

   (loss)                                                (4)          2,181

  Retained earnings (accumulated deficit)            27,271         (18,727)

                                              -------------   -------------



    Total stockholders' equity                      316,867         232,454

                                              -------------   -------------



TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY    $     670,987   $     545,422

                                              =============   =============





                               FORTINET, INC.



                   CONSOLIDATED STATEMENTS OF OPERATIONS

                  (in thousands, except per share amounts)

                                (unaudited)



                       Three Months Ended            Nine Months Ended

                  ---------------------------  ----------------------------

                  September 30, September 30,  September 30,  September 30,

                       2011          2010           2011           2010

                  ------------- -------------  -------------  -------------



REVENUE:

  Product         $      53,093 $      35,913  $     139,945  $      94,060

  Services               57,835        44,527        159,192        124,116

  Ratable and

   other

   revenue(1)             5,498         4,531         13,578         12,921

                  ------------- -------------  -------------  -------------



    Total revenue       116,426        84,971        312,715        231,097

                  ------------- -------------  -------------  -------------



COST OF REVENUE:

  Product(2)             20,606        13,263         51,272         36,399

  Services(2)             9,438         6,565         25,815         19,851

  Ratable and

   other revenue          1,095         1,615          4,026          4,733

                  ------------- -------------  -------------  -------------



    Total cost of

     revenue             31,139        21,443         81,113         60,983

                  ------------- -------------  -------------  -------------



GROSS PROFIT:

  Product                32,487        22,650         88,673         57,661

  Services               48,397        37,962        133,377        104,265

  Ratable and

   other revenue          4,403         2,916          9,552          8,188

                  ------------- -------------  -------------  -------------



    Total gross

     profit              85,287        63,528        231,602        170,114

                  ------------- -------------  -------------  -------------



OPERATING

 EXPENSES:

  Research and

   development(2)        16,834        12,389         47,197         36,999

  Sales and

   marketing(2)          36,934        26,987        105,548         81,487

  General and

   administrative(

   2)                     5,359         5,993         16,473         16,985

                  ------------- -------------  -------------  -------------



    Total

     operating

     expenses            59,127        45,369        169,218        135,471

                  ------------- -------------  -------------  -------------



OPERATING INCOME         26,160        18,159         62,384         34,643



INTEREST INCOME             904           514          2,560          1,181



OTHER INCOME

 (EXPENSE) -- NET            60          (402)          (242)          (565)

                  ------------- -------------  -------------  -------------



INCOME BEFORE

 INCOME TAXES            27,124        18,271         64,702         35,259



PROVISION FOR

 INCOME TAXES             9,207         4,254         18,704         10,155

                  ------------- -------------  -------------  -------------



NET INCOME        $      17,917 $      14,017  $      45,998  $      25,104

                  ============= =============  =============  =============



Net income per

 share(3):

  Basic           $        0.12 $        0.10  $        0.30  $        0.18

                  ============= =============  =============  =============

  Diluted         $        0.11 $        0.09  $        0.28  $        0.16

                  ============= =============  =============  =============



Weighted-average

 shares

 outstanding(3):

  Basic                 153,265       143,672        151,958        138,376

                  ============= =============  =============  =============

  Diluted               163,869       155,842        163,554        153,290

                  ============= =============  =============  =============





------------------

(1) Ratable and other revenue was formerly referred to as Ratable product

 and services revenue. We have made this change to reflect the $2.6 million

 sale of patents during the current quarter.



(2) Includes

 stock-based

 compensation

 expense as

 follows:

  Cost of product

   revenue        $          64 $          26  $         129  $          76

  Cost of services

   revenue                  564           242          1,124            684

  Research and

   development            1,516           600          2,954          1,741

  Sales and

   marketing              2,708         1,017          6,289          2,780

  General and

   administrative           882           549          2,178          1,565

                  ------------- -------------  -------------  -------------

                  $       5,734 $       2,434  $      12,674  $       6,846

                  ============= =============  =============  =============



(3) Effective June 1, 2011, we completed a two-for-one stock split of our

 outstanding shares of common stock. In accordance with GAAP, we have

 retroactively displayed the effect of the change in our condensed

 consolidated financial statements.





                               FORTINET, INC.



                   CONSOLIDATED STATEMENTS OF CASH FLOWS

                               (in thousands)

                                (unaudited)



                                                    Nine Months Ended

                                              -----------------------------

                                              September 30,   September 30,

                                                   2011            2010

                                              -------------   -------------

CASH FLOWS FROM OPERATING ACTIVITIES:

  Net income                                  $      45,998   $      25,104

  Adjustments to reconcile net income to net

   cash provided by operating activities:

    Depreciation and amortization                     5,114           4,233

    Loss on disposal of fixed assets                     22              14

    Amortization of investment premiums               9,508           4,934

    Stock-based compensation                         12,674           6,846

    Excess tax benefit from employee stock

     option plans                                    (9,264)         (4,191)

    Changes in operating assets and

     liabilities:

      Accounts receivable -- net                     (3,559)         (5,011)

      Inventory                                      (1,478)         (2,815)

      Deferred tax assets                            (5,546)             (8)

      Prepaid expenses and other current

       assets                                        (2,429)         (2,905)

      Deferred cost of revenues                       3,188            (274)

      Other assets                                   (1,456)             50

      Accounts payable                                2,514            (689)

      Accrued liabilities                             4,867           1,711

      Accrued payroll and compensation                1,582           4,312

      Other liabilities                               2,664               -

      Deferred revenue                               22,471          33,321

      Income taxes payable                           23,413           7,327

                                              -------------   -------------



        Net cash provided by operating

         activities                                 110,283          71,959

                                              -------------   -------------



CASH FLOWS FROM INVESTING ACTIVITIES:

  Purchases of investments                         (407,110)       (311,995)

  Maturities and sales of investments               279,681          80,097

  Payments made in connection with business

   acquisition, net                                  (2,623)              -

  Purchase of property and equipment                 (2,785)         (2,900)

  Deposits of restricted cash                             -              (4)

                                              -------------   -------------



        Net cash used in investing activities      (132,837)       (234,802)

                                              -------------   -------------



CASH FLOWS FROM FINANCING ACTIVITIES:

  Proceeds from exercise of stock options and

   warrants                                          14,018          23,892

  Offering costs paid in connection with

   Initial Public Offering                               -             (872)

  Excess tax benefit from employee stock

   option plans                                       9,264           4,191

                                              -------------   -------------



        Net cash provided by financing

         activities                                  23,282          27,211

                                              -------------   -------------



EFFECT OF EXCHANGE RATES ON CASH AND

  CASH EQUIVALENTS                                     (957)            313

                                              -------------   -------------



NET DECREASE IN CASH AND CASH EQUIVALENTS              (229)       (135,319)



CASH AND CASH EQUIVALENTS -- Beginning of

 period                                              66,859         212,458

                                              -------------   -------------



CASH AND CASH EQUIVALENTS -- End of period    $      66,630   $      77,139

                                              =============   =============





Reconciliations of non-GAAP results of operations measures to the nearest

comparable GAAP measures

(in thousands)

(unaudited)



Reconciliation of GAAP revenue to billings



                                                   Three Months Ended

                                             -----------------------------

                                             September 30,   September 30,

                                                  2011            2010

                                             -------------   -------------

Total revenue                                $     116,426   $      84,971

  Increase in deferred revenue                       1,927           9,729

                                             -------------   -------------



Total billings (Non-GAAP)                    $     118,353   $      94,700

                                             =============   =============





---------------------------------------------------------------------------





Reconciliation of cash provided by operating

activities to free cash flow



                                                   Three Months Ended

                                             -----------------------------

                                             September 30,   September 30,

                                                  2011            2010

                                             -------------   -------------

Net cash provided by operating activities    $      36,039   $      32,193

  Less purchases of property and equipment          (1,335)           (671)

                                             -------------   -------------



Free cash flow (Non-GAAP)                    $      34,704   $      31,522

                                             =============   =============



Net cash used in investing activities*       $     (52,950)  $     (32,953)

                                             =============   =============



Net cash provided by financing activities    $       7,572   $       7,635

                                             =============   =============





*includes purchases of property and

 equipment.





Reconciliations of non-GAAP results of operations measures to the nearest

 comparable GAAP measures and other non-GAAP financial information

(in thousands, except per share amounts)

(unaudited)



Reconciliation of GAAP to non-GAAP operating income, operating margin, net

 income and net income per share.



                   Three Months Ended              Three Months Ended

                   September 30, 2011              September 30, 2010

             ------------------------------  ------------------------------

               GAAP    Adjust      Non-GAAP    GAAP    Adjust      Non-GAAP

              Results   ments       Results   Results   ments       Results

             --------  ------      --------  --------  ------      --------



Operating

 Income      $ 26,160   5,191  (a) $ 31,351  $ 18,159   2,434  (b) $ 20,593

             ========  ======      ========  ========  ======      ========



Operating

 Margin            22%                   27%       21%                   24%

             ========              ========  ========              ========



                        5,191  (a)                      2,434  (b)

                       (1,457) (c)                     (2,993) (c)

                       ------                          ------



Net Income   $ 17,917   3,734      $ 21,651  $ 14,017    (559)     $ 13,458

             ========              ========  ========              ========



Net income

 per share -

 diluted     $   0.11              $   0.13  $   0.09              $   0.09

             ========              ========  ========              ========



Shares used

 in per share

 calculation

 - diluted    163,869               163,869   155,842               155,842

             ========              ========  ========              ========



(a) To eliminate $5.7 million of stock-based compensation expense offset by

 the $0.5 million of patent settlement income in the three months ended

 September 30, 2011.

(b) To eliminate $2.4 million of stock-based compensation expense in the

 three months ended September 30, 2010.

(c) To eliminate the tax effects related to expenses noted in (a) and (b).



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Investor & Media Contact:



Michelle Spolver

Fortinet, Inc.

408-486-7837

mspolver@fortinet.com



Source: Fortinet

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