SUNNYVALE, CA -- (Marketwired) -- 10/23/13 -- Fortinet® (NASDAQ: FTNT)

• Billings of $165.2 million, up 14% year over year1
• Revenues of $154.7 million, up 14% year over year
• GAAP diluted net income per share of $0.07
• Non-GAAP diluted net income per share of $0.121
• Cash flow from operations of $25.4 million
• Free cash flow of $22.2 million1
• Cash, cash equivalents and investments of $841.0 million, with no debt

Fortinet® (NASDAQ: FTNT) -- a leader in high-performance network security -- today announced financial results for the third quarter ended September 30, 2013.

"We were very pleased with our solid execution during the third quarter, particularly our ability to exceed the high end of our billings, revenue and earnings per share expectations," said Ken Xie, founder, president and chief executive officer. "Our performance highlights the underlying strength of our technology and market adoption of Fortinet's solutions across the globe. We are excited about the innovation we delivered with our latest FortiASIC NP-6 processor, which enables the fastest firewall and IPS performance in the industry and brings with it meaningful benefits to customers."

Financial Highlights for the Third Quarter of 2013

• Billings1: Total billings were $165.2 million for the third quarter of 2013, an increase of 14% compared to $145.0 million in the same quarter of 2012.
  
  
• Revenue: Total revenue was $154.7 million for the third quarter of 2013, an increase of 14% compared to $136.3 million in the same quarter of 2012. Within total revenue, product revenue was $69.7 million, an increase of 11% compared to the same quarter of 2012. Services revenue was $83.9 million, an increase of 20% compared to the same quarter of 2012.
  
  
• Deferred Revenue: Deferred revenue was $400.2 million as of September 30, 2013, an increase of 18% compared to deferred revenue of $340.1 million as of September 30, 2012, and an increase of $10.5 million from $389.7 million as of June 30, 2013.
  
  
• Cash and Cash Flow: As of September 30, 2013, cash, cash equivalents and investments were $841.0 million, compared to $814.4 million as of June 30, 2013. In the third quarter of 2013, cash flow from operations was $25.4 million and free cash flow was $22.2 million1.
  
  
• GAAP Operating Income: GAAP operating income was $18.3 million for the third quarter of 2013, representing a GAAP operating margin of 12%. GAAP operating income was $25.8 million for the same quarter of 2012, representing a GAAP operating margin of 19%.
  
  
• GAAP Net Income and Diluted Net Income Per Share: GAAP net income was $11.0 million for the third quarter of 2013, based on a 40% effective tax rate for the quarter. This compared to GAAP net income of $17.2 million for the same quarter of 2012, based on a 36% effective tax rate for the quarter. GAAP diluted net income per share was $0.07 for the third quarter of 2013, based on 168.7 million weighted-average diluted shares outstanding, compared to $0.10 for the same quarter of 2012, based on 166.8 million weighted-average diluted shares outstanding.
  
  
• Non-GAAP Operating Income1: Non-GAAP operating income was $30.0 million for the third quarter of 2013, representing a non-GAAP operating margin of 19%. Non-GAAP operating income was $34.3 million for the same quarter of 2012, representing a non-GAAP operating margin of 25%.
  
  
• Non-GAAP Net Income and Diluted Net Income Per Share1: Non-GAAP net income was $20.2 million for the third quarter of 2013, based on a 33% effective tax rate for the quarter. Non-GAAP net income for the same quarter of 2012 was $23.3 million, based on a 34% effective tax rate. Non-GAAP diluted net income per share was $0.12 for the third quarter of 2013 based on 168.7 million weighted-average diluted shares outstanding, compared to $0.14 for the same quarter of 2012, based on 166.8 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".

Conference Call Details
Fortinet will host a conference call today, October 23, 2013, 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 # 74655490. 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 30, 2013, by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID# 74655490.

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 # 74655967. 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 30, 2013 by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID # 74655967.

About Fortinet (www.fortinet.com)
Fortinet (NASDAQ: FTNT) is a worldwide provider of network security appliances and a 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 a majority of the 2012 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 © 2013 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 adoption of our solutions. 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, including specific economic risks such as those that may result from the U.S. budget process; 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; customer support challenges; 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 and the loss of any key personnel; changes in strategy; risks associated with management of growth; lengthy sales and implementation cycles, particularly in larger organizations and service providers; 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 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. 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 other 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 expense and amortization expense of certain intangible assets 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, amortization expense of certain intangible assets, 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 and amortization expense of certain intangible assets. Stock-based compensation expense 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 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 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 and amortization expense of certain intangible assets reduced by the income from payments we received from a patent settlement, and includes the impact of the tax adjustment, if any, required to achieve the effective tax rate on a pro forma 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 to achieve the effective tax rate on a pro forma basis, which could differ from the GAAP tax rate. 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. Management compensates 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,
			2013			2012
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents		$	144,546		$	122,975
	Short-term investments			368,472			290,719
	Accounts receivable-Net			107,802			107,642
	Inventory			46,876			21,060
	Prepaid expenses and other current assets			38,271			26,878
		Total current assets		705,967			569,274
PROPERTY AND EQUIPMENT-Net				28,380			25,638
LONG-TERM INVESTMENTS				327,987			325,892
GOODWILL AND OTHER INTANGIBLE ASSETS-Net				10,612			2,117
DEFERRED TAX ASSETS-Non-current				51,996			48,525
OTHER ASSETS				3,200			4,051
TOTAL ASSETS			$	1,128,142		$	975,497
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
	Accounts payable		$	33,257		$	20,816
	Accrued liabilities			32,317			22,263
	Accrued payroll and compensation			30,450			28,957
	Deferred revenue			271,302			247,268
		Total current liabilities		367,326			319,304
DEFERRED REVENUE-Non-current				128,871			115,917
INCOME TAX LIABILITIES-Non-current				30,568			28,778
OTHER LIABILITIES				1,424			564
	Total liabilities			528,189			464,563
STOCKHOLDERS' EQUITY:
	Common stock			163			162
	Additional paid-in capital			455,279			400,075
	Treasury stock			-			(2,995	)
	Accumulated other comprehensive income			1,653			3,091
	Retained earnings			142,858			110,601
		Total stockholders' equity		599,953			510,934
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY			$	1,128,142		$	975,497
Note: Certain prior period amounts have been combined to conform to current period presentation

FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
			Three Months Ended								Nine Months Ended
			September 30,				September 30,				September 30,				September 30,
			2013				2012				2013				2012
REVENUE:
	Product		$	69,687			$	63,027			$	194,162			$	177,923
	Services			83,883				69,782				239,447				197,332
	Ratable and other revenue			1,129				3,459				4,338				7,222
		Total revenue		154,699				136,268				437,947				382,477
COST OF REVENUE:
	Product 1			27,126				23,995				77,032				66,997
	Services 1			16,374				13,166				48,207				36,846
	Ratable and other revenue			430				647				1,527				2,135
		Total cost of revenue		43,930				37,808				126,766				105,978
GROSS PROFIT:
	Product			42,561				39,032				117,130				110,926
	Services			67,509				56,616				191,240				160,486
	Ratable and other revenue			699				2,812				2,811				5,087
		Total gross profit		110,769				98,460				311,181				276,499
OPERATING EXPENSES:
	Research and development 1			26,421				20,498				74,913				60,553
	Sales and marketing 1			56,687				44,743				162,660				131,038
	General and administrative 1			9,382				7,449				26,161				19,473
		Total operating expenses		92,490				72,690				263,734				211,064
OPERATING INCOME				18,279				25,770				47,447				65,435
INTEREST INCOME				1,282				1,318				3,988				3,606
OTHER EXPENSE-Net				(1,151	)			(317	)			(1,036	)			(315	)
INCOME BEFORE INCOME TAXES				18,410				26,771				50,399				68,726
PROVISION FOR INCOME TAXES				7,381				9,565				18,142				23,397
NET INCOME			$	11,029			$	17,206			$	32,257			$	45,329
Net income per share:
	Basic		$	0.07			$	0.11			$	0.20			$	0.29
	Diluted		$	0.07			$	0.10			$	0.19			$	0.27
Weighted-average shares outstanding:
	Basic			162,906				158,751				162,150				157,416
	Diluted			168,666				166,791				168,054				166,127
1 Includes stock-based compensation expense as follows:
	Cost of product revenue		$	91			$	85			$	277			$	237
	Cost of services revenue			1,297				1,018				3,543				2,704
	Research and development			3,548				2,525				9,605				6,774
	Sales and marketing			5,215				3,879				13,927				10,797
	General and administrative			1,627				1,323				4,432				3,416
			$	11,778			$	8,830			$	31,784			$	23,928

FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2013				2012				2013				2012
Net income		$	11,029			$	17,206			$	32,257			$	45,329
Other comprehensive income (loss), net of reclassification adjustments:
	Foreign currency translation gains (losses)		912				1,092				(901	)			867
	Unrealized gains (losses) on investments		600				1,968				(826	)			3,441
	Unrealized losses on cash flow hedges		-				(19	)			-				-
	Tax (provision) benefit related to items of other comprehensive income or loss		(209	)			(618	)			289				(1,133	)
Other comprehensive income (loss), net of tax			1,303				2,423				(1,438	)			3,175
Comprehensive income		$	12,332			$	19,629			$	30,819			$	48,504

FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
				Nine Months Ended
				September 30,				September 30,
				2013				2012
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income			$	32,257			$	45,329
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			11,511				8,076
		Amortization of investment premiums			8,900				10,002
		Stock-based compensation			31,784				23,928
		Excess tax benefit from employee stock option plans			(2,504	)			(9,611	)
		Other non-cash items, net			520				893
		Changes in operating assets and liabilities:
		Accounts receivable-Net			589				5,680
		Inventory			(31,344	)			(14,977	)
		Prepaid expenses and other current assets			219				(71	)
		Other assets			(13,928	)			(2,630	)
		Accounts payable			11,054				3,049
		Accrued payroll and compensation			1,400				1,563
		Accrued and other liabilities			2,631				1,301
		Deferred revenue			36,425				45,192
		Income taxes payable			11,202				15,849
			Net cash provided by operating activities		100,716				133,573
CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchases of investments				(419,124	)			(523,389	)
	Sales of investments				25,488				25,768
	Maturities of investments				303,852				343,174
	Purchases of property and equipment				(6,729	)			(20,283	)
	Payments made in connection with business acquisitions				(7,635	)			(749	)
		Net cash used in investing activities			(104,148	)			(175,479	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from issuance of common stock				24,470				36,006
	Taxes paid related to net share settlement of equity awards				(966	)			-
	Excess tax benefit from employee stock option plans				2,504				9,611
		Net cash provided by financing activities			26,008				45,617
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS					(1,005	)			(235	)
NET INCREASE IN CASH AND CASH EQUIVALENTS					21,571				3,476
CASH AND CASH EQUIVALENTS-Beginning of period					122,975				71,990
CASH AND CASH EQUIVALENTS-End of period				$	144,546			$	75,466
Note: Certain prior period amounts have been combined to conform to current period presentation

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,
		2013				2012
Total revenue		$	154,699			$	136,268
	Add increase in deferred revenue		10,491				8,710
Total billings (Non-GAAP)		$	165,190			$	144,978
Reconciliation of net cash provided by operating activities to free cash flow
			Three Months Ended
			September 30,				September 30,
			2013				2012
Net cash provided by operating activities		$	25,384			$	40,770
	Less purchases of property and equipment		(3,160	)			(16,428	)
Free cash flow (Non-GAAP)		$	22,224			$	24,342

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 30, 2013												Three Months Ended September 30, 2012
		GAAP Results				Adjustments				Non-GAAP Results				GAAP Results				Adjustments				Non-GAAP Results
Operating Income		$	18,279			$	11,723		(a)	$	30,002			$	25,770			$	8,578		(b)	$	34,348
Operating Margin			12	%							19	%			19	%							25	%
Adjustments:
	Stock-based compensation expense						11,778												8,830
	Amortization expense of certain intangible assets						423		(c)										226		(c)
	Patent settlement income						(478	)											(478	)
	Tax adjustment						(2,563	)	(d)										(2,454	)	(e)
Net Income		$	11,029			$	9,160			$	20,189			$	17,206			$	6,124			$	23,330
Diluted net income per share		$	0.07							$	0.12			$	0.10							$	0.14
Shares used in per share calculations - diluted			168,666								168,666				166,791								166,791
(a) To exclude $11.8 million of stock-based compensation expense and $0.4 million of amortization expense of certain intangible assets offset by $0.5 million of patent settlement income in the three months ended September 30, 2013.
(b) To exclude $8.8 million of stock-based compensation expense and $0.2 million of amortization expense of certain intangible assets offset by $0.5 million of patent settlement income in the three months ended September 30, 2012.
(c) Effective second quarter of fiscal 2013, amortization expense of certain intangible assets is excluded from GAAP net income. Prior period amounts have been adjusted to conform to the current period presentation.
(d) Non-GAAP financial information is adjusted to achieve an overall 33 percent effective tax rate on a pro forma basis, which differs from the GAAP tax rate, in the three months ended September 30, 2013.
(e) Non-GAAP financial information is adjusted to achieve an overall 34 percent effective tax rate on a pro forma basis, which differs from the GAAP tax rate, in the three months ended September 30, 2012.

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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