Fortinet, Inc.
Oct 22, 2015

Fortinet Reports Strong Third Quarter 2015 Financial Results

Record Billings Growth of 41% Year Over Year

SUNNYVALE, CA -- (Marketwired) -- 10/22/15 --

Fortinet® (NASDAQ: FTNT), a global leader in high performance cyber security solutions, today announced financial results for the third quarter ended September 30, 2015.

"For the third consecutive quarter this year, Fortinet accelerated billings growth to record levels, delivering 41% billings growth -- the highest ever as a public company," said Ken Xie, founder, chairman and chief executive officer. "Additionally, we delivered non-GAAP operating margin and earnings per share upside to shareholders. We are executing well and our investment strategy is working. Fortinet remains well-positioned to gain market share globally due to our strong competitive technology position and best-in-class end-to-end network security solutions portfolio, as well as the ongoing success of our land and expand strategy."

Financial Highlights for the Third Quarter of 2015

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."

2 During the third quarter of 2015, there were no shares repurchased under our share repurchase program.

Conference Call Details

Fortinet will host a conference call today, October 22, 2015, 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 # 55728223. 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 October 29, 2015, by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID# 55728223.

Following the financial results conference call, Fortinet 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 # 55732708. 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 October 29, 2015 by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID # 55732708.

About Fortinet (www.fortinet.com)

Fortinet (NASDAQ: FTNT) protects the most valuable assets of some of the largest enterprise, service provider and government organizations across the globe. The company's fast, secure and global cyber security solutions provide broad, high-performance protection against dynamic security threats while simplifying the IT infrastructure. They are strengthened by the industry's highest level of threat research, intelligence and analytics. Unlike pure-play network security providers, Fortinet can solve organizations' most important security challenges, whether in networked, application or mobile environments - be it virtualized/cloud or physical. More than 200,000 customers worldwide, including some of the largest and most complex organizations, trust Fortinet to protect their brands. Learn more at www.fortinet.com, the Fortinet Blog or FortiGuard Labs.

Copyright © 2015 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, FortiScan, FortiAP, FortiDB, FortiVoice 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, potential growth of our business and market share gains. 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; increasing competitiveness in the security market; the dynamic nature of the security market; specific economic risks in different geographies, and among different customer segments; changes in foreign currency exchange rates; 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; sales execution risks; product defects; security breaches; 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; risks associated with business acquisitions, including integration risks and assumption of unknown liabilities; technological changes that make our products and services less competitive; competition and pricing pressure; risks associated with increased international sales, including the impact of foreign currency exchange rates; 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 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 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 less any deferred revenue balances acquired from business combination(s) during the period, if any. 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 viability of our business. 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 revenue 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, repurchasing outstanding common stock, 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 liquidity 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 free cash flow excludes cash used for capital expenditures and also excludes cash provided by or used for other investing and financing activities. Management compensates 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.

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, including inventory fair value adjustment amortization and other purchase accounting adjustments, impairment and amortization of intangible assets, restructuring charges, expenses associated with the implementation of a new Enterprise Resource Planning (ERP) system, and, when applicable, any other significant non-recurring items in a given quarter. 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, business acquisition-related charges, including inventory fair value adjustment amortization and other purchase accounting adjustments, impairment and amortization of intangible assets, restructuring charges, expenses associated with the implementation of a new ERP system, and, when applicable, any other significant non-recurring items 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 or loss calculated in accordance with GAAP. First, non-GAAP operating income excludes stock-based compensation expense, business acquisition-related charges, including inventory fair value adjustment amortization and other purchase accounting adjustments, impairment and amortization of intangible assets, expenses associated with the implementation of a new ERP system, and any other significant non-recurring items. 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 expense is an important part of our employees' compensation and impacts their performance. Third, the components of the costs that we exclude from our calculation of non-GAAP operating income may differ from the components that other 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 or loss 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 items noted above under non-GAAP operating income and operating margin, adjusted for the impact of the tax adjustment, if any required, resulting in an effective tax rate on a non-GAAP basis, which could differ from the GAAP effective tax rate. 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 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 could differ from the GAAP tax rate. We believe the effective tax rates we used 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 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)

    September 30,
 2015
    December 31,
 2014
 
ASSETS            
CURRENT ASSETS:            
  Cash and cash equivalents   $ 540,712     $ 283,254  
  Short-term investments     367,446       436,766  
  Accounts receivable-net     174,111       184,741  
  Inventory     80,246       69,477  
  Deferred tax assets     47,304       41,484  
  Prepaid expenses and other current assets     41,921       31,143  
    Total current assets     1,251,740       1,046,865  
LONG-TERM INVESTMENTS     261,506       271,724  
PROPERTY AND EQUIPMENT-net     83,372       58,919  
DEFERRED TAX ASSETS     72,003       31,080  
GOODWILL     4,260       2,824  
OTHER INTANGIBLE ASSETS-net     18,967       2,832  
OTHER ASSETS     15,325       10,530  
TOTAL ASSETS   $ 1,707,173     $ 1,424,774  
LIABILITIES AND STOCKHOLDERS' EQUITY                
CURRENT LIABILITIES:                
  Accounts payable   $ 48,793     $ 49,947  
  Accrued liabilities     29,831       29,016  
  Accrued payroll and compensation     47,915       45,875  
  Income taxes payable     5,477       2,689  
  Deferred revenue     471,118       368,929  
    Total current liabilities     603,134       496,456  
DEFERRED REVENUE     235,793       189,828  
INCOME TAXES PAYABLE     56,906       45,139  
OTHER LIABILITIES     15,954       17,385  
    Total liabilities     911,787       748,808  
STOCKHOLDERS' EQUITY:                
  Common stock     172       166  
  Additional paid-in capital     671,138       562,504  
  Accumulated other comprehensive loss     (90 )     (349 )
  Retained earnings     124,166       113,645  
    Total stockholders' equity     795,386       675,966  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 1,707,173     $ 1,424,774  

FORTINET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share amounts)

    Three Months Ended     Nine Months Ended  
    September 30, 2015     September 30, 2014     September 30, 2015     September 30, 2014  
REVENUE:                                
  Product   $ 119,737     $ 87,731     $ 332,023     $ 249,880  
  Service     140,331       105,617       380,716       296,515  
    Total revenue     260,068       193,348       712,739       546,395  
COST OF REVENUE:                                
  Product1     46,167       35,636       134,932       105,230  
  Service1     25,534       21,249       69,869       60,155  
    Total cost of revenue     71,701       56,885       204,801       165,385  
GROSS PROFIT:                                
  Product     73,570       52,095       197,091       144,650  
  Service     114,797       84,368       310,847       236,360  
    Total gross profit     188,367       136,463       507,938       381,010  
OPERATING EXPENSES:                                
  Research and development1     42,110       30,790       115,315       89,783  
  Sales and marketing1     120,994       80,433       333,531       222,576  
  General and administrative1     21,220       9,789       51,199       29,243  
  Restructuring charges     5,883       -       5,883       -  
    Total operating expenses     190,207       121,012       505,928       341,602  
OPERATING INCOME (LOSS)     (1,840 )     15,451       2,010       39,408  
INTEREST INCOME     1,333       1,339       4,119       3,991  
OTHER EXPENSE-net     (653 )     (1,005 )     (2,160 )     (1,968 )
INCOME (LOSS) BEFORE INCOME TAXES     (1,160       15,785       3,969       41,431  
                                 
PROVISION FOR (BENEFIT FROM) INCOME TAXES     (9,329 )     11,729       (6,552 )     22,901  
NET INCOME   $ 8,169       4,056       10,521       18,530  
Net income per share:                                
  Basic   $ 0.05     $ 0.02     $ 0.06     $ 0.11  
  Diluted   $ 0.05     $ 0.02     $ 0.06     $ 0.11  
Weighted-average shares outstanding:                                
  Basic     171,648       164,294       169,898       163,289  
  Diluted     177,897       169,727       175,963       168,735  
                                 
1Includes stock-based compensation as follows:                                
  Cost of product revenue   $ 291     $ 60     $ 641     $ 351  
  Cost of service revenue     1,849       1,522       5,141       4,214  
  Research and development     6,663       4,505       17,361       12,558  
  Sales and marketing     13,904       7,397       34,482       18,890  
  General and administrative     3,612       1,183       9,376       6,300  
    $ 26,319     $ 14,667     $ 67,001     $ 42,313  

FORTINET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited, in thousands)

    Three Months Ended     Nine Months Ended  
    September 30, 2015     September 30, 2014     September 30, 2015     September 30, 2014  
Net income   $ 8,169     $ 4,056     $ 10,521     $ 18,530  
Other comprehensive income (loss) -- net of taxes:                                
  Foreign currency translation losses     -       (432 )     -       (333 )
  Unrealized gains (losses) on investments     337       (977 )     400       (993 )
  Tax provision (benefit) related to items of other comprehensive income or loss     (118 )     342       (141 )     348  
Other comprehensive income (loss) -- net of taxes     219       (1,067       259       (978 )
Comprehensive income   $ 8,388     $ 2,989     $ 10,780     $ 17,552  

FORTINET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

    Nine Months Ended  
    September 30,
 2015
    September 30,
 2014
 
CASH FLOWS FROM OPERATING ACTIVITIES:                
  Net income   $ 10,521     $ 18,530  
  Adjustments to reconcile net income to net cash provided by operating activities:                
    Depreciation and amortization     22,206       16,519  
    Amortization of investment premiums     5,770       6,680  
    Stock-based compensation     67,001       42,313  
    Excess tax benefit from stock-based compensation     -       (4,325
    Other non-cash items -- net     2,681       3,801  
    Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in business acquisitions:                
      Accounts receivable -- net     20,923       13,140  
      Inventory     (12,023 )     (11,095 )
      Deferred tax assets     (28,297 )     (12,186 )
      Prepaid expenses and other current assets     (8,210       (2,781 )
      Other assets     (264 )     (159 )
      Accounts payable     (9,842 )     3,806  
      Accrued liabilities     (3,296 )     2,818  
      Accrued payroll and compensation     (1,895 )     5,651  
      Other liabilities     (1,232 )     14,350  
      Deferred revenue     136,193       68,006  
      Income taxes payable     13,753       (3,850 )
        Net cash provided by operating activities     213,989       161,218  
CASH FLOWS FROM INVESTING ACTIVITIES:                
  Purchases of investments     (329,687       (388,808  
  Sales of investments     35,384       27,282  
  Maturities of investments     364,256       371,837  
  Purchases of property and equipment     (29,013       (26,802  
  Payments made in connection with business acquisitions, net of cash acquired     (38,025       (17 )
        Net cash provided by (used in) investing activities     2,915       (16,508 )
CASH FLOWS FROM FINANCING ACTIVITIES:                
  Proceeds from issuance of common stock     63,543       40,529  
  Taxes paid related to net share settlement of equity awards     (22,989 )     (8,506 )
  Excess tax benefit from stock-based compensation     -       4,325  
  Repurchase and retirement of common stock     -       (38,235 )
        Net cash provided by (used in) financing activities     40,554       (1,887 )
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS     -       (600 )
NET INCREASE IN CASH AND CASH EQUIVALENTS     257,458       142,223  
CASH AND CASH EQUIVALENTS -- Beginning of period     283,254       115,873  
CASH AND CASH EQUIVALENTS -- End of period   $ 540,712     $ 258,096  

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
  September 30,
 2015
    September 30,
 2014
Total revenue $ 260,068     $ 193,348
  Add increase in deferred revenue   49,350       19,810
  Less deferred revenue balance acquired in business combination   (9,800 )     -
Total billings (Non-GAAP) $ 299,618     $ 213,158

Reconciliation of net cash provided by operating activities to free cash flow

  Three Months Ended  
  September 30,
 2015
    September 30,
 2014
 
Net cash provided by operating activities $ 65,065     $ 56,518  
  Less purchases of property and equipment   (13,325 )     (5,780 )
Free cash flow (Non-GAAP) $ 51,740     $ 50,738  

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

(Unaudited, in thousands, except per share amounts)

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 September 30, 2015     Three Months Ended September 30, 2014  
    GAAP Results     Adjustments     Non-GAAP Results     GAAP Results     Adjustments   Non-GAAP Results  
Operating income (loss)   $(1,840 )   38,230   (a) $36,390     $15,451     $14,911 (b) $30,362  
Operating margin   -0.7 %         14 %   8 %       16 %
  Adjustments:                                  
  Stock-based compensation         26,319                 14,667      
  Amortization of intangible assets         1,319                 244      
  ERP-related expenses         2,473                 -      
  Business acquisition-related charges         934                 -      
  Inventory fair value adjustment amortization         1,302                 -      
  Restructuring charges         5,883                 -      
  Tax adjustment         (22,304 ) (c)             985 (c)    
Net income   $8,169     $15,926     $24,095     $4,056     $15,896   $19,952  
Diluted net income per share   $0.05           $0.14     $0.02         $0.12  
Shares used in diluted net income per share calculations   177,897           177,897     169,727         169,727  

(a) To exclude $26.3 million of stock-based compensation, $1.3 million of amortization of intangible assets, $2.5 million of ERP-related expenses, $0.9 million of business acquisition-related charges, $1.3 million of inventory fair value adjustment amortization recorded pursuant to our business acquisition, and $5.9 million of restructuring charges in the three months ended September 30, 2015.

(b) To exclude $14.7 million of stock-based compensation and $0.2 million of amortization of intangible assets in the three months ended September 30, 2014.

(c) Non-GAAP financial information is adjusted resulting in an overall 35% percent effective tax rate on a non-GAAP basis, which differs from the GAAP effective tax rate.

Investor Contact:

Michelle Spolver
Fortinet, Inc.
408-486-7837
mspolver@fortinet.com

Media Contact:

Sandra Wheatley
Fortinet, Inc.
408-391-9408
swheatley@fortinet.com

Source: Fortinet

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