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Fortinet Reports Third Quarter 2012 Financial Results
- Revenues of
$136.3 million , up 17% year over year(2) - Billings of
$145.0 million , up 22% year over year(1) - GAAP diluted net income per share of
$0.10 - Non-GAAP diluted net income per share of
$0.14 (1) - Cash flow from operations of
$40.8 million - Free cash flow of
$24.3 million (1,3) - Cash, cash equivalents and investments of
$690.3 million (3), with no debt
Financial Highlights for the Third Quarter of 2012
- Revenue(2): Total revenue was
$136.3 million for the third quarter of 2012, an increase of 17% compared to$116.4 million in the same quarter of 2011. Within total revenue, product revenue was$63.0 million , an increase of 19% compared to the same quarter of 2011. Services revenue was$69.8 million , an increase of 21% compared to the same quarter of 2011.
- Billings(1,2): Total billings were
$145.0 million for the third quarter of 2012, an increase of 22% compared to$118.4 million in the same quarter of 2011.
- Deferred Revenue: Deferred revenue was
$340.1 million as ofSeptember 30, 2012 , an increase of 24% compared to deferred revenue of$275.1 million as ofSeptember 30, 2011 , and up$8.7 million from$331.4 million as ofJune 30, 2012 .
Cash and Cash Flow (1,2,3): As ofSeptember 30, 2012 , cash, cash equivalents and investments were$690.3 million , compared to$644.4 million as ofJune 30, 2012 . In the third quarter of 2012, cash flow from operations was$40.8 million and free cash flow was$24.3 million .
- GAAP Operating Income(1,2): GAAP operating income was
$25.8 million for the third quarter of 2012, representing a GAAP operating margin of 19%. GAAP operating income was$26.2 million for the same quarter of 2011, representing a GAAP operating margin of 22%.
- GAAP Net Income and Diluted Net Income Per Share(1,2): GAAP net income was
$17.2 million for the third quarter of 2012, based on a 36% tax rate for the quarter. This compares to GAAP net income of$17.9 million for the same quarter of 2011, based on a 34% tax rate for the quarter. GAAP diluted net income per share was$0.10 for the third quarter of 2012, based on 166.8 million weighted-average diluted shares outstanding, compared to$0.11 for the same quarter of 2011, based on 163.9 million weighted-average diluted shares outstanding.
- Non-GAAPOperating Income(1,2): Non-GAAP operating income was
$34.1 million for the third quarter of 2012, representing a non-GAAP operating margin of 25%. Non-GAAP operating income was$31.4 million for the same quarter of 2011, representing a non-GAAP operating margin of 27%.
- Non-GAAPNet Income and Diluted Net Income Per Share(1,2): Non-GAAP net income was
$23.2 million for the third quarter of 2012, based on a 34% effective tax rate for the quarter. Non-GAAP net income for the same quarter of 2011 was$21.7 million , based on a 33% effective tax rate. Non-GAAP diluted net income per share was$0.14 for the third quarter of 2012 based on 166.8 million weighted-average diluted shares outstanding, compared to$0.13 for the same quarter of 2011, based on 163.9 million weighted-average diluted shares outstanding.
(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) Includes the impact of a
(3) Includes the impact of
Management Commentary:
Conference Call Details
Following
About
Copyright © 2012 Fortinet, Inc. All rights reserved. The symbols ® and ™ denote respectively federally registered trademarks and unregistered trademarks of
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 operating margin expansion. 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 most recent Annual Report on Form 10-K, our most recent Quarterly Report on Form 10-Q and
our other filings with the
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)
September 30, December 31,
2012 2011
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 75,466 $ 71,990
Short-term investments 299,180 318,283
Accounts receivable, net of allowance for
doubtful accounts of $234 and $336 ,
respectively 89,843 95,522
Inventory 26,182 16,249
Deferred tax assets 7,088 7,578
Prepaid expenses and other current assets 16,893 13,948
------------- -------------
Total current assets 514,652 523,570
PROPERTY AND EQUIPMENT-Net 26,020 7,966
DEFERRED TAX ASSETS-Non-current 50,393 46,523
LONG-TERM INVESTMENTS 315,657 148,414
OTHER ASSETS 6,546 8,274
------------- -------------
TOTAL ASSETS $ 913,268 $ 734,747
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 23,160 $ 19,768
Accrued liabilities 19,032 15,971
Accrued payroll and compensation 25,940 24,197
Deferred revenue 230,562 206,928
------------- -------------
Total current liabilities 298,694 266,864
DEFERRED REVENUE-Non-current 109,516 87,905
OTHER LIABILITIES 26,589 21,624
------------- -------------
Total liabilities 434,799 376,393
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock 161 156
Additional paid-in capital 388,632 317,026
Treasury stock (2,995) (2,995)
Accumulated other comprehensive income 3,577 402
Retained earnings 89,094 43,765
------------- -------------
Total stockholders' equity 478,469 358,354
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 913,268 $ 734,747
============= =============
FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
Three Months Ended Nine Months Ended
-------------------- --------------------
September September September September
30, 2012 30, 2011 30, 2012 30, 2011
REVENUE:
Product $ 63,027 $ 53,093 $ 177,923 $ 139,945
Services 69,782 57,835 197,332 159,192
Ratable and other revenue 3,459 5,498 7,222 13,578
--------- --------- --------- ---------
Total revenue 136,268 116,426 382,477 312,715
--------- --------- --------- ---------
COST OF REVENUE:
Product (1) 23,995 20,606 66,997 51,272
Services (1) 13,166 9,438 36,846 25,815
Ratable and other revenue 647 1,095 2,135 4,026
--------- --------- --------- ---------
Total cost of revenue 37,808 31,139 105,978 81,113
--------- --------- --------- ---------
GROSS PROFIT:
Product 39,032 32,487 110,926 88,673
Services 56,616 48,397 160,486 133,377
Ratable and other revenue 2,812 4,403 5,087 9,552
--------- --------- --------- ---------
Total gross profit 98,460 85,287 276,499 231,602
--------- --------- --------- ---------
OPERATING EXPENSES:
Research and development (1) 20,498 16,834 60,553 47,197
Sales and marketing (1) 44,743 36,934 131,038 105,548
General and administrative (1) 7,449 5,359 19,473 16,473
--------- --------- --------- ---------
Total operating expenses 72,690 59,127 211,064 169,218
--------- --------- --------- ---------
OPERATING INCOME 25,770 26,160 65,435 62,384
INTEREST INCOME 1,318 904 3,606 2,560
OTHER INCOME (EXPENSE)-Net (317) 60 (315) (242)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 26,771 27,124 68,726 64,702
PROVISION FOR INCOME TAXES 9,565 9,207 23,397 18,704
--------- --------- --------- ---------
NET INCOME $ 17,206 $ 17,917 $ 45,329 $ 45,998
========= ========= ========= =========
Net income per share:
Basic $ 0.11 $ 0.12 $ 0.29 $ 0.30
========= ========= ========= =========
Diluted $ 0.10 $ 0.11 $ 0.27 $ 0.28
========= ========= ========= =========
Weighted-average shares
outstanding:
Basic 158,751 153,265 157,416 151,958
========= ========= ========= =========
Diluted 166,791 163,869 166,127 163,554
========= ========= ========= =========
(1) Includes stock-based
compensation expense as follows:
Cost of product revenue $ 85 $ 64 $ 237 $ 129
Cost of services revenue 1,018 564 2,704 1,124
Research and development 2,525 1,516 6,774 2,954
Sales and marketing 3,879 2,708 10,797 6,289
General and administrative 1,323 882 3,416 2,178
--------- --------- --------- ---------
$ 8,830 $ 5,734 $ 23,928 $ 12,674
========= ========= ========= =========
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
Three Months Ended Nine Months Ended
---------------------- ----------------------
September September September September
30, 2012 30, 2011 30, 2012 30, 2011
---------- ---------- ---------- ----------
Net income $ 17,206 $ 17,917 $ 45,329 $ 45,998
Other comprehensive income:
Foreign currency
translation 1,092 (1,722) 867 (797)
Unrealized gains (losses)
on investments 1,968 (1,347) 3,441 (1,194)
Unrealized losses on cash
flow hedges (19) (119) - (194)
Tax provision related to
items of other
comprehensive income (618) - (1,133) -
---------- ---------- ---------- ----------
Net change in accumulated
other comprehensive income 2,423 (3,188) 3,175 (2,185)
---------- ---------- ---------- ----------
Comprehensive income $ 19,629 $ 14,729 $ 48,504 $ 43,813
========== ========== ========== ==========
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine Months Ended
--------------------------------
September 30, September 30,
2012 2011
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 45,329 $ 45,998
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 8,076 5,114
Loss on disposal of fixed assets 37 22
Amortization of investment premiums 10,002 9,508
Stock-based compensation 23,928 12,674
Excess tax benefits from employee
stock options plans (9,611) (9,264)
Other non-cash items, net 856 -
Changes in operating assets and
liabilities:
Accounts receivable-net 5,680 (3,559)
Inventory (14,977) (1,478)
Deferred tax assets (4,515) (5,546)
Prepaid expenses and other current
assets (71) (1,009)
Other assets 1,885 312
Accounts payable 3,049 2,514
Accrued liabilities 2,662 4,867
Accrued payroll and compensation 1,563 1,582
Other liabilities (1,361) 2,664
Deferred revenue 45,192 22,471
Income taxes payable 15,849 23,413
--------------- ---------------
Net cash provided by operating activities 133,573 110,283
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (523,389) (407,110)
Sales of investments 25,768 75,582
Maturities of investments 343,174 204,099
Purchases of property and equipment (20,283) (2,785)
Payment made in connection with
business acquisition (749) (2,623)
--------------- ---------------
Net cash used in investing activities (175,479) (132,837)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 36,006 14,018
Excess tax benefit from employee stock
option plans 9,611 9,264
--------------- ---------------
Net cash provided by financing activities 45,617 23,282
--------------- ---------------
EFFECT OF EXCHANGE RATES ON CASH AND CASH
EQUIVALENTS (235) (957)
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 3,476 (229)
CASH AND CASH EQUIVALENTS-Beginning of
period $ 71,990 $ 66,859
--------------- ---------------
CASH AND CASH EQUIVALENTS-End of period 75,466 66,630
=============== ===============
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, September 30,
2012 2011
-------------- --------------
Total revenue $ 136,268 $ 116,426
Increase in deferred revenue 8,710 1,927
-------------- --------------
Total billings (Non-GAAP) $ 144,978 $ 118,353
============== ==============
Reconciliation of net cash provided by operating activities to free cash
flow
Three Months Ended
------------------------------
September 30, September 30,
2012 2011
-------------- --------------
Net cash provided by operating activities $ 40,770 $ 36,039
Less purchases of property and equipment (16,428) (1,335)
-------------- --------------
Free cash flow (Non-GAAP) $ 24,342 $ 34,704
============== ==============
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 September Three Months Ended September
30, 2012 30, 2011
------------------------------ ------------------------------
GAAP Adjust- Non-GAAP GAAP Adjust- Non-GAAP
Results ments Results Results ments Results
Operating
Income $ 25,770 $ 8,352 (a) $ 34,122 $ 26,160 $ 5,191 (b) $ 31,351
======== ======= ======== ======== ======= ========
Operating
Margin 19% 25% 22% 27%
======== ======== ======== ========
8,352 (a) 5,191 (b)
(2,377)(c) (1,457)(c)
------- -------
Net Income $ 17,206 $ 5,975 $ 23,181 $ 17,917 $ 3,734 $ 21,651
======== ======== ======== ========
Diluted net
income per
share $ 0.10 $ 0.14 $ 0.11 $ 0.13
======== ======== ======== ========
Shares used
in per
share
calculations
- diluted 166,791 166,791 163,869 163,869
======== ======== ======== ========
(a) To exclude $8.8 million of stock-based compensation expense offset by
$0.5 million of patent settlement income in the three months ended
September 30, 2012 .
(b) To exclude $5.7 million of stock-based compensation expense offset by
$0.5 million of patent settlement income in the three months ended
September 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
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