Fortinet, Inc.
Jul 25, 2012

Fortinet Reports Second Quarter 2012 Financial Results

SUNNYVALE, CA -- (Marketwire) -- 07/25/12 -- Fortinet® (NASDAQ: FTNT)

Fortinet® (NASDAQ: FTNT) -- a leader in high-performance network security -- today announced financial results for the second quarter ended June 30, 2012.

Financial Highlights for the Second Quarter of 2012

(1) 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."

Management Commentary:

Ken Xie, founder, president and chief executive officer of Fortinet, stated: "Our strong performance in the second quarter highlights the demand for our network security offerings, which deliver unmatched performance and broad, flexible deployment options. We had healthy growth across all geographies and continued market share gains, especially with large U.S. enterprises. The momentum for Fortinet is high and we are excited about our technology roadmap for the second half of the year."

Ken Goldman, chief financial officer of Fortinet, stated: "We are very pleased with our second quarter results, particularly our ability to achieve billings growth of 32%, which is the strongest increase we've had since the first quarter of 2011. Our outperformance and ability to continue to grow more than twice the rate of our core market in challenging economic conditions is significant, and evidence that our vision and go-to-market strategy are working and our investments in the business are paying off."

Conference Call Details

Fortinet will host a conference call today, July 25, 2012, 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 # 99551686. 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 8, 2012, by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID# 99551686.

Following Fortinet's earnings 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 product and financial questions. To access this call, dial (877) 303-6913 (domestic) or (224) 357-2188 (international) with conference ID # 99562437. This follow-up call will be webcast live and accessible at http://investor.fortinet.com, and 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 8, 2012 by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID # 99562437.

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 2011 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 © 2012 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, FortiDB and FortiWeb. 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 the momentum in our business, growth of our business and our product pipeline in 2012. 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 development and introductions and innovation; litigation and disputes 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; 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; competition and pricing pressure; 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 Generally Accepted Accounting Principles (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 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 the Company 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. 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 most recent Quarterly Report on Form 10-Q and Annual Report on Form 10-K.

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 diluted net income per share. 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. We define non-GAAP diluted net income per share as non-GAAP net income divided by the weighted-average diluted 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 complete picture of our recurring core business operating results, we exclude from non-GAAP net income and non-GAAP diluted net income per share, the tax effects associated with stock-based compensation and the patent settlement. We believe the effective tax rates we used 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 diluted net income per share. We compensate 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,   December 31,

                                                      2012         2011

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

                      ASSETS

CURRENT ASSETS:

  Cash and cash equivalents                       $    81,226  $     71,990

  Short-term investments                              320,403       318,283

  Accounts receivable, net of allowance for

   doubtful accounts of $229 and $336,

   respectively                                        95,351        95,522

  Inventory                                            20,828        16,249

  Deferred tax assets                                   7,063         7,578

  Prepaid expenses and other current assets            15,570        13,948

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

    Total current assets                              540,441       523,570

PROPERTY AND EQUIPMENT-Net                             10,247         7,966

DEFERRED TAX ASSETS-Non-current                        46,003        46,523

LONG-TERM INVESTMENTS                                 242,769       148,414

OTHER ASSETS                                            7,715         8,274

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

TOTAL ASSETS                                      $   847,175  $    734,747

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

       LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

  Accounts payable                                $    24,101  $     19,768

  Accrued liabilities                                  17,280        15,971

  Accrued payroll and compensation                     27,086        24,197

  Deferred revenue                                    226,510       206,928

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

    Total current liabilities                         294,977       266,864

DEFERRED REVENUE-Non-current                          104,858        87,905

OTHER LIABILITIES                                      20,696        21,624

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

    Total liabilities                                 420,531       376,393

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

STOCKHOLDERS' EQUITY:

  Common stock                                            159           156

  Additional paid-in capital                          356,438       317,026

  Treasury stock                                       (2,995)       (2,995)

  Accumulated other comprehensive income                1,154           402

  Retained earnings                                    71,888        43,765

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

    Total stockholders' equity                        426,644       358,354

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

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY        $   847,175  $    734,747

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







                               FORTINET, INC.

              CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

            (Unaudited, in thousands, except per share amounts)



                                    Three Months Ended    Six Months Ended

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

                                    June 30,  June 30,   June 30,  June 30,

                                      2012      2011       2012      2011

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

REVENUE:

  Product                          $  61,692 $  46,687  $ 114,896 $  86,852

  Services                            65,412    52,671    127,550   101,357

  Ratable and other revenue            1,858     3,665      3,763     8,080

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

    Total revenue                    128,962   103,023    246,209   196,289

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

COST OF REVENUE:

  Product (1)                         23,935    16,591     43,003    30,666

  Services (1)                        12,467     8,596     23,680    16,377

  Ratable and other revenue              725     1,371      1,487     2,931

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

    Total cost of revenue             37,127    26,558     68,170    49,974

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

GROSS PROFIT:

  Product                             37,757    30,096     71,893    56,186

  Services                            52,945    44,075    103,870    84,980

  Ratable and other revenue            1,133     2,294      2,276     5,149

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

    Total gross profit                91,835    76,465    178,039   146,315

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

OPERATING EXPENSES:

  Research and development (1)        20,388    15,942     40,055    30,363

  Sales and marketing (1)             44,259    35,896     86,295    68,614

  General and administrative (1)       6,238     5,848     12,023    11,114

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

    Total operating expenses          70,885    57,686    138,373   110,091

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

OPERATING INCOME                      20,950    18,779     39,666    36,224

INTEREST INCOME                        1,203       863      2,287     1,656

OTHER INCOME (EXPENSE)-Net                73      (207)         3      (302)

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

INCOME BEFORE INCOME TAXES            22,226    19,435     41,956    37,578

PROVISION FOR INCOME TAXES             8,276     4,941     13,833     9,497

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

NET INCOME                         $  13,950 $  14,494  $  28,123 $  28,081

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

Net income per share:

  Basic                            $    0.09 $    0.10  $    0.18 $    0.19

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

  Diluted                          $    0.08 $    0.09  $    0.17 $    0.17

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

Weighted-average shares

 outstanding:

  Basic                              157,474   152,267    156,742   151,293

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

  Diluted                            166,061   163,887    165,808   163,393

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



(1) Includes stock-based

 compensation expense as follows:

  Cost of product revenue          $      88 $      43  $     152 $      65

  Cost of services revenue               941       362      1,686       560

  Research and development             2,292       985      4,249     1,438

  Sales and marketing                  3,475     1,681      6,918     3,581

  General and administrative           1,056       799      2,093     1,296

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

                                   $   7,852 $   3,870  $  15,098 $   6,940

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







              CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                         (Unaudited, in thousands)







                                   Three Months Ended    Six Months Ended

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

                                   June 30,   June 30,  June 30,   June 30,

                                     2012       2011      2012       2011

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

Net income                        $  13,950  $  14,494 $  28,123  $  28,081

Other comprehensive income:

  Foreign currency translation         (783)       269      (225)       923

  Unrealized gains (losses) on

   investments                         (326)       159     1,473        154

  Unrealized gains (losses) on

   cash flow hedges                      19          -        19        (74)

  Tax provision related to items

   of other comprehensive income        114          -      (515)         -

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

Net change in accumulated other

 comprehensive income                  (976)       428       752      1,003

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

Comprehensive income              $  12,974  $  14,922 $  28,875  $  29,084

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







              CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                         (Unaudited, in thousands)





                                                         Six Months Ended

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

                                                        June 30,   June 30,

                                                          2012       2011

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

CASH FLOWS FROM OPERATING ACTIVITIES:

  Net income                                           $  28,123  $  28,081

  Adjustments to reconcile net income to net cash

   provided by operating activities:

    Depreciation and amortization                          5,077      3,336

    Loss on disposal of fixed assets                          31          -

    Amortization of investment premiums                    6,528      6,291

    Stock-based compensation                              15,098      6,940

    Excess tax benefits from employee stock option

     plans                                                (5,158)    (4,491)

    Changes in operating assets and liabilities:

    Accounts receivable-net                                 (328)        63

    Inventory                                             (7,952)    (1,455)

    Deferred tax assets                                      520     (5,546)

    Prepaid expenses and other current assets               (250)    (1,000)

    Other assets                                             886       (887)

    Accounts payable                                       4,321        355

    Accrued liabilities                                      910      3,660

    Accrued payroll and compensation                       2,998        357

    Other liabilities                                     (1,014)     3,170

    Deferred revenue                                      36,502     20,544

    Income taxes payable                                   5,744     14,826

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

    Net cash provided by operating activities             92,036     74,244

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

CASH FLOWS FROM INVESTING ACTIVITIES:

  Purchases of investments                              (355,025)  (287,659)

  Sales of investments                                    44,255     75,582

  Maturities of investments                              209,242    136,263

  Purchases of property and equipment                     (3,855)    (1,450)

  Payment made in connection with business acquisition      (550)    (2,623)

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

    Net cash used in investing activities               (105,933)   (79,887)

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

CASH FLOWS FROM FINANCING ACTIVITIES:

  Proceeds from issuance of common stock                  17,650     11,219

  Excess tax benefit from employee stock option plans      5,158      4,491

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

    Net cash provided by financing activities             22,808     15,710

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

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS        325      1,093

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

NET INCREASE IN CASH AND CASH EQUIVALENTS                  9,236     11,160

CASH AND CASH EQUIVALENTS-Beginning of period             71,990     66,859

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

CASH AND CASH EQUIVALENTS-End of period                $  81,226  $  78,019

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







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

 comparable GAAP measures

(Unaudited, in thousands)





Reconciliation of GAAP revenue to billings





                                                      Three Months Ended

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

                                                     June 30,     June 30,

                                                       2012         2011

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

Total revenue                                      $   128,962  $   103,023

  Increase in deferred revenue                          16,796        7,170

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

Total billings (Non-GAAP)                          $   145,758  $   110,193

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





Reconciliation of net cash provided by operating activities to free cash

 flow





                                                       Three Months Ended

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

                                                     June 30,     June 30,

                                                       2012         2011

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

Net cash provided by operating activities          $    43,518  $    34,068

  Less purchases of property and equipment              (2,231)        (756)

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

Free cash flow (Non-GAAP)                          $    41,287  $    33,312

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







Reconciliation of non-GAAP results of operations to the nearest comparable

 GAAP measures

(Unaudited, in thousands, except per share amounts)



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

 income and diluted net income per share





              Three Months Ended June 30,     Three Months Ended June 30,

                          2012                            2011

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

                                     Non-                             Non-

               GAAP   Adjust-        GAAP     GAAP    Adjust-         GAAP

             Results   ments       Results   Results   ments        Results

Operating

 Income      $20,950  $ 7,374  (a) $28,324  $ 18,779  $ 3,392  (b)  $22,171

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

Operating

 Margin           16%                   22%       18%                    22%

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

                        7,374  (a)                      3,392  (b)

                       (1,788) (c)                     (2,592) (c)

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

Net Income   $13,950  $ 5,586      $19,536  $ 14,494  $   800       $15,294

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

Diluted net

 income per

 share       $  0.08               $  0.12  $   0.09                $  0.09

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

Shares used

 in per

 share

 calcula-

 tions

 -diluted    166,061               166,061   163,887                163,887

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



(a) To exclude $7.8 million of stock-based compensation expense offset by

$0.5 million of patent settlement income in the three months ended June 30,

2012.



(b) To exclude $3.9 million of stock-based compensation expense offset by

$0.5 million of patent settlement income in the three months ended June 30,

2011.



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







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Investor Contact:



Michelle Spolver

Fortinet, Inc.

408-486-7837

mspolver@fortinet.com



Media Contact:



Rick Popko

Fortinet, Inc.

408-486-7853

rpopko@fortinet.com



Source: Fortinet

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