Fortinet, Inc.
Feb 2, 2017

Fortinet Reports Fourth Quarter and Full Year 2016 Financial Results

Revenue and Billings Up 22% in Fourth Quarter

Company Improves Profitability on GAAP and non-GAAP Basis

Fourth Quarter 2016 Highlights

Full Year 2016 Highlights

SUNNYVALE, Calif., Feb. 02, 2017 (GLOBE NEWSWIRE) -- Fortinet® (NASDAQ:FTNT), a global leader in high performance cyber security solutions, today announced financial results for the fourth quarter and full year ended December 31, 2016.

"We are pleased with our strong finish to 2016, demonstrating our strong technology advantage and revenue growth," said Ken Xie, founder, chairman and chief executive officer. "Our ability to provide a broad, powerful, and automated Security Fabric that protects all points in the network, from IoT to cloud, sets Fortinet apart. This technology advantage, combined with improvements in sales execution delivered strong results in the mid to large enterprise segments of the market and positions us well for future growth."

Financial Highlights for the Fourth Quarter of 2016

Financial Highlights for the Full Year 2016

1 A reconciliation of GAAP to non-GAAP financial and liquidity 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 fourth quarter and year ended December 31, 2016, we repurchased $35.8 million and $110.8 million, respectively, of our common stock under our share repurchase program. During the fourth quarter and year ended December 31, 2015, we repurchased $60.0 million of our common stock under our share repurchase program.

Conference Call Details
Fortinet will host a conference call today, February 2, 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 # 40971273. 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 February 9, 2017, by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID# 40971273.

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 # 40987500. 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 February 9, 2017 by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID # 40987500.

About Fortinet (www.fortinet.com)

Fortinet (NASDAQ:FTNT) secures the largest enterprise, service provider and government organizations around the world. Fortinet empowers its customers with intelligent, seamless protection across the expanding attack surface and the power to take on ever-increasing performance requirements of the borderless network -- today and into the future. Only the Fortinet Security Fabric architecture can deliver security without compromise to address the most critical security challenges, whether in networked, application, cloud or mobile environments. More than 300,000 customers worldwide trust Fortinet to protect their businesses. Learn more at http://www.fortinet.com, the Fortinet Blog, or FortiGuard Labs.

Copyright © 2017 Fortinet, Inc. All rights reserved. The symbols ® and ™ denote respectively federally registered trademarks and unregistered trademarks of Fortinet, Inc., its subsidiaries and affiliates. Fortinet's trademarks include, but are not limited to, the following: Fortinet, FortiGate, FortiGuard, FortiManager, FortiMail, FortiClient, FortiCloud, FortiCare, FortiAnalyzer, FortiReporter, FortiOS, FortiASIC, FortiWiFi, FortiSwitch, FortiVoIP, FortiBIOS, FortiLog, FortiResponse, FortiCarrier, 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 our ability to continue to grow in the future and our positioning for future growth. Although we attempt to be accurate in making forward-looking statements, it is possible that future circumstances might differ from the assumptions on which such statements are based. Important factors that could cause results to differ materially from the statements herein include the following: general economic risks; global economic conditions; regional and country-specific economic challenges and conditions, and foreign currency risks; increasing competitiveness in the security market; the dynamic nature of the security market; specific economic risks worldwide and in different geographies, and among different customer segments; uncertainty regarding increased business and renewals from existing customers; uncertainties around continued success in sales growth and market share gains; longer sales cycles, particularly for larger enterprise customers; failure to convert sales pipeline into final sales; risks associated with successful implementation of multiple integrated software products and other product functionality risks; sales and marketing execution risks; execution risks around new product development and introductions and innovation; risks of slowing growth in the security market in general; litigation, disputes and investigations and the potential cost, distraction and damage to sales and reputation caused thereby; market acceptance of new products and services; the ability to attract and retain personnel; changes in strategy; risks associated with management of growth; lengthy sales and implementation cycles, particularly in larger organizations; technological changes that make our products and services less competitive; risks associated with the adoption of, and demand for, our products and services in general and by specific customer segments; pricing pressure; risks related to integrating acquisitions; and the other risk factors set forth from time to time in our most recent Annual Report on Form 10-K, our most recent Quarterly Report on Form 10-Q and our other filings with the SEC, copies of which are available free of charge at the SEC's website at www.sec.gov or upon request from our investor relations department. All forward-looking statements herein reflect our opinions only as of the date of this release, and we undertake no obligation, and expressly disclaim any obligation, to update forward-looking statements herein in light of new information or future events.

Non-GAAP Financial Measures

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

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

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

Free cash flow (Non-GAAP). We define free cash flow as net cash provided by operating activities minus capital expenditures such as purchases of real estate and other property and equipment. We 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 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. Analysis of free cash flow facilitates management's comparison of our operating results to those of our peer companies. A limitation of using free cash flow rather than 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 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.

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, 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. 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 may impact 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 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 (loss) and diluted net income per share calculated in accordance with GAAP.

  


FORTINET, INC.
 CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands) 
 
 December 31,
 2016
 December 31,
 2015
ASSETS   
CURRENT ASSETS:   
Cash and cash equivalents$709,003  $543,277 
Short-term investments376,522  348,074 
Accounts receivable—net312,998  259,563 
Inventory106,887  83,868 
Prepaid expenses and other current assets33,306  35,761 
Total current assets1,538,716  1,270,543 
LONG-TERM INVESTMENTS224,983  272,959 
DEFERRED TAX ASSETS182,745  119,216 
PROPERTY AND EQUIPMENT—net137,249  91,067 
OTHER INTANGIBLE ASSETS—net24,828  17,640 
GOODWILL14,553  4,692 
OTHER ASSETS16,867  14,393 
TOTAL ASSETS$2,139,941  $1,790,510 
LIABILITIES AND STOCKHOLDERS' EQUITY   
CURRENT LIABILITIES:   
Accounts payable$56,732  $61,500 
Accrued liabilities35,640  33,028 
Accrued payroll and compensation78,138  61,111 
Income taxes payable13,588  8,379 
Deferred revenue645,342  514,652 
Total current liabilities829,440   678,670 
DEFERRED REVENUE390,007  276,651 
INCOME TAX LIABILITIES68,551  60,624 
OTHER LIABILITIES14,262  19,188 
Total liabilities1,302,260  1,035,133 
STOCKHOLDERS' EQUITY:   
Common stock173  171 
Additional paid-in capital800,653  687,658 
Accumulated other comprehensive loss(765) (933)
Retained earnings37,620  68,481 
Total stockholders' equity837,681  755,377 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $ 2,139,941  $1,790,510 



FORTINET, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
    
 Three Months Ended Year Ended
 December 31,
 2016
 December 31,
 2015
 December 31,
 2016
  December 31,
 2015
REVENUE:       
Product$158,925  $144,759  $548,110  $476,782 
Service203,905  151,770  727,333  532,486 
Total revenue362,830  296,529  1,275,443  1,009,268 
COST OF REVENUE:        
Product 156,616  55,466  208,984  190,398 
Service 134,275  26,510  128,853  96,379 
Total cost of revenue90,891  81,976  337,837  286,777 
GROSS PROFIT:       
Product102,309  89,293  339,126  286,384 
Service169,630  125,260  598,480  436,107 
Total gross profit271,939  214,553  937,606  722,491 
OPERATING EXPENSES:       
Research and development 145,589  42,814  183,084  158,129 
Sales and marketing 1162,873  136,840  626,501  470,371 
General and administrative 117,451  20,315  81,080  71,514 
Restructuring charges833  1,717  3,997  7,600 
Total operating expenses226,746  201,686  894,662  707,614 
OPERATING INCOME45,193  12,867  42,944  14,877 
INTEREST INCOME1,964  1,176  7,303  5,295 
OTHER EXPENSE—net(3,650) (1,007) (7,099) (3,167)
INCOME BEFORE INCOME TAXES43,507  13,036  43,148  17,005 
PROVISION FOR INCOME TAXES18,341  15,570  10,961  9,018 
NET INCOME (LOSS)$25,166  $(2,534) $32,187  $7,987 
Net income (loss) per share:       
Basic$0.15  $(0.01) $0.19  $0.05 
Diluted$0.14  $(0.01) $0.18  $0.05 
Weighted-average shares outstanding:       
Basic173,315  171,831  172,621  170,385 
Diluted176,679  171,831  176,338  176,141 
        
1 Includes stock-based compensation as follows:       
Cost of product revenue$313  $332  $1,200  $973 
Cost of service revenue2,276  1,980  8,771  7,121 
Research and development7,871  7,194  30,120  24,555 
Sales and marketing17,930  14,954  68,113  49,436 
General and administrative3,691  3,627  14,219  13,003 
 $32,081  $28,087  $122,423  $95,088 



 FORTINET, INC.
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in thousands)
    
 Three Months Ended Year Ended
 December 31,
 2016
 December 31,
 2015
 December 31,
 2016
 December 31,
 2015
Net income (loss)$25,166  $(2,534) $32,187  $7,987 
Other comprehensive income (loss):       
Unrealized gains (losses) on investments(1,411) (1,297) 258  (897)
Tax provision (benefit) related to items of other comprehensive income (loss)(493) (454) 90  (313)
Other comprehensive income (loss)—net of taxes(918) (843) 168  (584)
Comprehensive income (loss)$24,248  $(3,377) $32,355  $7,403 



FORTINET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
    
 Three Months Ended Year Ended
 December 31,
 2016
 December 31,
 2015
  December 31,
 2016
 December 31,
 2015
CASH FLOWS FROM OPERATING ACTIVITIES:       
Net income (loss)$25,166  $(2,534) $32,187  $7,987 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:       
Depreciation and amortization13,624  9,383  48,520  31,589 
Amortization of investment premiums952  1,687  4,780  7,457 
Stock-based compensation32,081  28,087  122,423   95,088 
Other non-cash items—net(2,202) 1,285  2,644  3,391 
Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in business acquisitions:       
Accounts receivable—net(70,663) (86,125) (57,875) (66,464)
Inventory(18,468) (6,661) (43,023) (19,088)
Deferred tax assets7,183  (1,554) (27,822) (29,851)
Prepaid expenses and other current assets(1,685) 5,176  2,616  (2,630)
Other assets243  931  (2,352) 667 
Accounts payable1,623  7,325  39   (2,517)
Accrued liabilities(3,808) 4,179  (3,210) 883 
Accrued payroll and compensation12,443  13,196  15,696  11,301 
Other liabilities(1,894) 3,247  (5,013) 2,016 
Deferred revenue100,094  84,317  242,961  222,346 
Income taxes payable6,348  6,619  13,137  20,372 
Net cash provided by operating activities101,037  68,558  345,708  282,547 
CASH FLOWS FROM INVESTING ACTIVITIES:       
Purchases of investments(103,035) (130,216) (473,608) (459,903)
Sales of investments6,506  12,516  28,311  47,900 
Maturities of investments115,484  122,163  460,443  486,419 
Purchases of property and equipment(16,863) (8,345) (67,182)  (37,358)
Payments made in connection with business acquisitions— net of cash acquired    (22,087) (38,025)
Net cash provided by (used in) investing activities2,092  (3,882) (74,123) (967)
CASH FLOWS FROM FINANCING ACTIVITIES:       
Proceeds from issuance of common stock2,569  3,771  44,861  67,314 
Taxes paid related to net share settlement of equity awards(8,380) (5,882) (38,266) (28,871)
Repurchase and retirement of common stock(35,828) (60,000) (110,828) (60,000)
Payments of debt assumed in business acquisition    (1,626)  
Net cash used in financing activities(41,639) (62,111) (105,859)  (21,557)
NET INCREASE IN CASH AND CASH EQUIVALENTS61,490  2,565  165,726  260,023 
CASH AND CASH EQUIVALENTS—Beginning of period647,513  540,712  543,277  283,254 
CASH AND CASH EQUIVALENTS—End of period$709,003  $543,277  $709,003  $543,277 



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 Year Ended
 December 31,
 2016
 December 31,
 2015
  December 31,
 2016
 December 31,
 2015
Net cash provided by operating activities$101,037  $68,558  $345,708  $282,547 
Less purchases of property and equipment(16,863) (8,345) (67,182) (37,358)
Free cash flow$84,174  $60,213  $278,526  $245,189 


Reconciliation of GAAP operating income to Non-GAAP operating income, operating margin, net income and diluted net income per share
    
 Three Months Ended December 31, 2016 Three Months Ended December 31, 2015
 GAAP Results Adjustments Non-GAAP Results GAAP Results Adjustments Non-GAAP Results
Operating income$45,193  $35,936 (a)$81,129  $12,867  $34,712 (b)$47,579 
Operating margin12%   22% 4%   16%
Adjustments:           
Stock-based compensation  32,081      28,087   
Amortization of acquired intangible assets  3,022      1,319   
ERP-related expenses        1,558   
Acquisition-related charges        451   
Inventory fair value adjustment amortization        1,580   
Restructuring charges  833       1,717   
Tax adjustment  (7,875)(c)    213 (c) 
Net income (loss)$25,166  $28,061  $53,227  $(2,534) $34,925  $32,391 
Diluted net income (loss) per share$0.14    $0.30  $(0.01)   $0.18 
Shares used in diluted net income per share calculations176,679    176,679  171,831    176,657 

(a) To exclude $32.1 million of stock-based compensation, $3.0 million of amortization of acquired intangible assets, and $0.8 million of restructuring charges in the three months ended December 31, 2016.
(b) To exclude $28.1 million of stock-based compensation, $1.3 million of amortization of acquired intangible assets, $1.6 million of ERP-related expenses, $0.5 million of acquisition-related charges, $1.6 million of inventory fair value adjustment amortization recorded pursuant to our business acquisition, and $1.7 million of restructuring charges in the three months ended December 31, 2015.
(c)  Non-GAAP financial information is adjusted to achieve an overall 33% percent and 34% percent effective tax rate in 2016 and 2015, respectively, on a non-GAAP basis, which differs from the GAAP effective tax rate.


 Year Ended December 31, 2016 Year Ended December 31, 2015
 GAAP Results Adjustments Non-GAAP Results GAAP Results Adjustments Non-GAAP Results
Operating income$42,944  $150,186 (a)$193,130  $14,877  $118,447 (b)$133,324 
Operating margin3%   15% 1%   13%
Adjustments:           
Stock-based compensation  122,423      95,088   
Impairment of acquired intangible assets        1,593   
Amortization of acquired intangible assets  9,308      3,126   
ERP-related expenses  13,362       5,426   
Acquisition-related charges  254      2,732   
Inventory fair value adjustment amortization  842      2,882   
Restructuring charges  3,997      7,600    
Tax adjustment  (52,839)(c)    (37,036)(c) 
Net income$32,187  $97,347  $129,534  $7,987  $81,411  $89,398 
Diluted net income per share$0.18    $0.73  $0.05    $0.51 
Shares used in diluted net income per share calculations176,338    176,338  176,141    176,141 

(a) To exclude $122.4 million of stock-based compensation, $9.3 million of amortization of acquired intangible assets, $13.4 million of ERP-related expenses, $0.3 million of acquisition-related charges, $0.8 million of inventory fair value adjustment amortization recorded pursuant to our business acquisition, and $4.0 million of restructuring charges in 2016.
(b) To exclude $95.1 million of stock-based compensation, $1.6 million of impairment of acquired intangible assets, $3.1 million of amortization of acquired intangible assets, $5.4 million of ERP-related expenses, $2.7 million of acquisition-related charges, $2.9 million of inventory fair value adjustment amortization recorded pursuant to our business acquisition, and $7.6 million of restructuring charges in 2015.
(c)  Non-GAAP financial information is adjusted to achieve an overall 33% percent and 34% percent effective tax rate in 2016 and 2015, respectively, on a non-GAAP basis, which differs from the GAAP effective tax rate.


Reconciliation of diluted weighted average shares outstanding used in the calculation of GAAP and non-GAAP earnings per share
     
  Three Months Ended Year Ended
  December 31,
 2016
 December 31,
 2015
 December 31,
 2016
 December 31,
 2015
Shares used in diluted net loss per share calculations - GAAP 176,679  171,831  176,338  176,141 
Adjustment for diluted weighted average shares outstanding(a)  4,826     
Shares used in diluted net income per share calculations - Non-GAAP 176,679  176,657  176,338   176,141 

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


Billings Reconciliation
    
 Three Months Ended Year Ended
 December 31,
 2016
 December 31,
 2015
 December 31,
 2016
 December 31,
 2015
Total revenue$362,830  $296,529  $1,275,443  $1,009,268 
Add change in deferred revenue100,557  84,392  244,046  232,546 
Less deferred revenue balance acquired in business acquisition    (4,400)  (9,800)
Total billings$463,387  $380,921   $1,515,089  $1,232,014 

 

Investor Contact:



Kelly Blough

Fortinet, Inc.

408-235-7700 x 81612

kblough@fortinet.com



Media Contact:



Sandra Wheatley

Fortinet, Inc.

408-391-9408

swheatley@fortinet.com

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