FTNT Q1-2013 Form 8K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 8-K
 
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
April 30, 2013
 
FORTINET, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
001-34511
 
77-0560389
(State or other jurisdiction
of incorporation)
 
(Commission
File Number)
 
(IRS Employer
Identification No.)
1090 Kifer Road
Sunnyvale, CA 94086
(Address of principal executive offices, including zip code)
(408) 235-7700
(Registrant’s telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report.)
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
¨
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))






Item 2.02 Results of Operations and Financial Condition.
On April 30, 2013, Fortinet, Inc. issued a press release reporting its financial results for the first quarter ended March 31, 2013. A copy of the press release is furnished herewith as Exhibit 99.1 and is incorporated herein by reference.
This information shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.
 
Item 9.01 Financial Statements and Exhibits
(d) Exhibits
 
 
 
 
Exhibit No.
  
Description
99.1
  
Press release dated April 30, 2013






SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
Fortinet, Inc.
 
 
 
Date: April 30, 2013
By:
/s/    JOHN WHITTLE
 
 
John Whittle
 
 
Vice President and General Counsel






EXHIBIT INDEX
 
Exhibit No.
  
Description
99.1
  
Press release dated April 30, 2013





FTNT Q1-2013 EX 99.1



Press Release


Investor Contact:
 
Media Contact:
 
 
 
Michelle Spolver
 
Rick Popko
Fortinet, Inc.
 
Fortinet, Inc.
408-486-7837
 
408-486-7853
mspolver@fortinet.com
 
rpopko@fortinet.com
        
Fortinet Reports First Quarter 2013 Financial Results
Revenues of $135.8 million, up 16% year over year
Billings of $148.5 million, up 8% year over year1 
GAAP diluted net income per share of $0.07
Non-GAAP diluted net income per share of $0.101 
Cash flow from operations of $37.7 million
Free cash flow of $36.1 million1 
Cash, cash equivalents and investments of $782.5 million, with no debt

SUNNYVALE, Calif. - April 30, 2013 - Fortinet® (NASDAQ: FTNT) - a leader in high-performance network security - today announced financial results for the first quarter ended March 31, 2013.


Financial Highlights for the First Quarter of 2013

Revenue: Total revenue was $135.8 million for the first quarter of 2013, an increase of 16% compared to $117.2 million in the same quarter of 2012. Within total revenue, product revenue was $58.0 million, an increase of 9% compared to the same quarter of 2012. Services revenue was $75.9 million, an increase of 22% compared to the same quarter of 2012.

Billings1: Total billings were $148.5 million for the first quarter of 2013, an increase of 8% compared to $137.0 million in the same quarter of 2012.

Deferred Revenue: Deferred revenue was $376.4 million as of March 31, 2013, an increase of 20% compared to deferred revenue of $314.6 million as of March 31, 2012, and up $13.2 million from $363.2 million as of December 31, 2012.

Cash and Cash Flow1: As of March 31, 2013, cash, cash equivalents and investments were $782.5 million, compared to $739.6 million as of December 31, 2012. In the first quarter of 2013, cash flow from operations was $37.7 million and free cash flow was $36.1 million.






GAAP Operating Income1: GAAP operating income was $15.4 million for the first quarter of 2013, representing a GAAP operating margin of 11%. GAAP operating income was $18.7 million for the same quarter of 2012, representing a GAAP operating margin of 16%.

GAAP Net Income and Diluted Net Income Per Share1: GAAP net income was $12.2 million for the first quarter of 2013, based on a 28% tax rate for the quarter. This compares to GAAP net income of $14.2 million for the same quarter of 2012, based on a 28% tax rate for the quarter. GAAP diluted net income per share was $0.07 for the first quarter of 2013, based on 167.8 million weighted-average diluted shares outstanding, compared to $0.09 for the same quarter of 2012, based on 165.8 million weighted-average diluted shares outstanding.  

Non-GAAP Operating Income1: Non-GAAP operating income was $24.2 million for the first quarter of 2013, representing a non-GAAP operating margin of 18%. Non-GAAP operating income was $25.5 million for the same quarter of 2012, representing a non-GAAP operating margin of 22%.

Non-GAAP Net Income and Diluted Net Income Per Share1: Non-GAAP net income was $17.3 million for the first quarter of 2013, based on a 33% effective tax rate for the quarter. Non-GAAP net income for the same quarter of 2012 was $17.5 million, based on a 34% effective tax rate. Non-GAAP diluted net income per share was $0.10 for the first quarter of 2013 based on 167.8 million weighted-average diluted shares outstanding, compared to $0.11 for the same quarter of 2012, based on 165.8 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.advantage remains strong.

While we performed well in Asia Pacific and the U.S. enterprise sector, our first quarter results were affected primarily by macroeconomic and geopolitical challenges in Latin America and EMEA, a shortfall in U.S service provider business, and to a lesser extent some inventory shortages and product transition issues, said Ken Xie, founder, president and chief executive officer. Given the macro uncertainty, we are moving forward cautiously yet confidently, as the network security market remains healthy and Fortinet’s competitive position and product advantage remains strong.

Conference Call Details
Fortinet will host a conference call today, April 30, 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 # 34804106. 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 May 7, 2013, by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID# 34804106.

Following Fortinet’s earnings conference call, the Company will host an additional question-and-answer session at 3:30 p.m. Pacific Time (6:30 p.m. Eastern Time) to provide an opportunity for financial analysts and investors to ask more detailed product and financial questions. To access this call, dial (877) 303-6913 (domestic) or (224) 357-2188 (international) with conference ID # 34804106. 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 May 7, 2013 by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID # 34804106.

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 the 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 potential growth of our business. 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 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). 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 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, 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 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. 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. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)  
 
March 31,
2013

December 31,
2012
ASSETS



CURRENT ASSETS:



Cash and cash equivalents
$
97,384


$
122,975

Short-term investments
362,996


290,719

Accounts receivable—Net
102,359


107,642

Inventory
23,933


21,060

Prepaid expenses and other current assets
26,988


26,878

Total current assets
613,660


569,274

PROPERTY AND EQUIPMENT—Net
25,803


25,638

LONG-TERM INVESTMENTS
322,158


325,892

GOODWILL AND OTHER INTANGIBLE ASSETS—Net
9,964

 
2,117

OTHER ASSETS
61,144


52,576

TOTAL ASSETS
$
1,032,729


$
975,497

LIABILITIES AND STOCKHOLDERS' EQUITY
 



CURRENT LIABILITIES:
 



Accounts payable
$
26,369


$
20,816

Accrued liabilities
21,677


22,263

Accrued payroll and compensation
26,350


28,957

Deferred revenue
257,332


247,268

Total current liabilities
331,728


319,304

DEFERRED REVENUE—Non-current
119,082


115,917

OTHER LIABILITIES
34,210


29,342

Total liabilities
485,020


464,563

STOCKHOLDERS' EQUITY:
 



Common stock
164


162

Additional paid-in capital
425,524


400,075

Treasury stock
(2,995
)

(2,995
)
Accumulated other comprehensive income
2,166


3,091

Retained earnings
122,850


110,601

Total stockholders' equity
547,709


510,934

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
1,032,729


$
975,497








FORTINET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
 
Three Months Ended
 
March 31,
2013

March 31,
2012
REVENUE:



Product
$
57,950

 
$
53,204

Services
75,896

 
62,138

Ratable and other revenue
1,974

 
1,905

Total revenue
135,820

 
117,247

COST OF REVENUE:
 
 
 
Product 1
22,958

 
19,067

Services 1
15,574

 
11,213

Ratable and other revenue
596

 
763

Total cost of revenue
39,128

 
31,043

GROSS PROFIT:
 
 
 
Product
34,992

 
34,137

Services
60,322

 
50,925

Ratable and other revenue
1,378

 
1,142

Total gross profit
96,692

 
86,204

OPERATING EXPENSES:
 
 
 
Research and development 1
23,334

 
19,667

Sales and marketing 1
49,976

 
42,036

General and administrative 1
7,991

 
5,786

Total operating expenses
81,301

 
67,489

OPERATING INCOME
15,391

 
18,715

INTEREST INCOME
1,369

 
1,085

OTHER INCOME (EXPENSE)—Net
215

 
(71
)
INCOME BEFORE INCOME TAXES
16,975

 
19,729

PROVISION FOR INCOME TAXES
4,726

 
5,556

NET INCOME
$
12,249

 
$
14,173

Net income per share:
 
 
 
Basic
$
0.08

 
$
0.09

Diluted
$
0.07

 
$
0.09

Weighted-average shares outstanding:
 
 
 
Basic
161,282

 
156,010

Diluted
167,823

 
165,751


 
 
 
1 Includes stock-based compensation expense as follows:
 
 
 
Cost of product revenue
$
90

 
$
64

Cost of services revenue
1,020

 
745

Research and development
2,766

 
1,957

Sales and marketing
4,118

 
3,443

General and administrative
1,305

 
1,037


$
9,299

 
$
7,246






FORTINET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)

 
Three Months Ended
 
March 31,
2013

March 31,
2012
Net income
$
12,249

 
$
14,173

Other comprehensive (loss) income, net of reclassification adjustments:
 
 
 
Foreign currency translation (losses) gains
(952
)
 
558

Unrealized gains on investments
42

 
1,799

Tax provision related to items of other comprehensive income or loss
(15
)
 
(629
)
Other comprehensive (loss) income, net of tax
(925
)

1,728

Comprehensive income
$
11,324


$
15,901









FORTINET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)

 
Three Months Ended
 
March 31,
2013

March 31,
2012
CASH FLOWS FROM OPERATING ACTIVITIES:



Net income
$
12,249

 
$
14,173

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
3,098

 
2,082

Amortization of investment premiums
3,051

 
3,255

Stock-based compensation
9,299

 
7,246

Excess tax benefit from employee stock option plans
(1,453
)
 
(2,320
)
Other non-cash items, net
(540
)
 
19

Changes in operating assets and liabilities:
 
 
 
Accounts receivable—Net
5,747

 
10,763

Inventory
(4,520
)
 
(3,409
)
Prepaid expenses and other current assets
(202
)
 
(345
)
Other assets
(8,568
)
 
569

Accounts payable
4,957

 
(6,319
)
Accrued liabilities
(11
)
 
(231
)
Accrued payroll and compensation
(2,416
)
 
(547
)
Deferred revenue
12,677

 
19,696

Income taxes payable
4,305

 
3,886

Net cash provided by operating activities
37,673

 
48,518

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of investments
(171,506
)
 
(192,567
)
Sales of investments
13,823

 
17,416

Maturities of investments
86,018

 
115,026

Purchases of property and equipment
(1,534
)
 
(1,624
)
Payments made in connection with business acquisitions
(5,979
)
 
(550
)
Net cash used in investing activities
(79,178
)
 
(62,299
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of common stock
14,464

 
13,551

Excess tax benefit from employee stock option plans
1,453

 
2,320

Net cash provided by financing activities
15,917

 
15,871

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
(3
)
 
703

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(25,591
)
 
2,793

CASH AND CASH EQUIVALENTS—Beginning of period
122,975

 
71,990

CASH AND CASH EQUIVALENTS—End of period
$
97,384

 
$
74,783








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

March 31,
2013

March 31,
2012
Total revenue
$
135,820

 
$
117,247

Add increase in deferred revenue
13,229

 
19,739

Less deferred revenue balance acquired in business combination
(550
)
 

Total billings (Non-GAAP)
$
148,499

 
$
136,986



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


Three Months Ended

March 31,
2013

March 31,
2012
Net cash provided by operating activities
$
37,673

 
$
48,518

Less purchases of property and equipment
(1,534
)
 
(1,624
)
Free cash flow (Non-GAAP)
$
36,139

 
$
46,894


     






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 March 31, 2013
 
Three Months Ended March 31, 2012
 
GAAP Results
 
Adjustments
 
Non-GAAP Results
 
GAAP Results
 
Adjustments
 
Non-GAAP Results
Operating Income
$
15,391

 
$
8,821

(a)
$
24,212

 
$
18,715

 
$
6,768

(b)
$
25,483

Operating Margin
11
%
 
 
 
18
%
 
16
%
 
 
 
22
%
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation expense
 
 
9,299


 
 
 
 
7,246


 
Patent settlement income
 
 
(478
)
 
 
 
 
 
(478
)
 
 
Tax adjustment
 
 
(3,787
)
(c)
 
 
 
 
(3,453
)
(d)
 
Net Income
$
12,249

 
$
5,034

 
$
17,283

 
$
14,173

 
$
3,315

 
$
17,488

Diluted net income per share
$
0.07

 
 
 
$
0.10

 
$
0.09

 
 
 
$
0.11

Shares used in per share calculations - diluted
167,823

 
 
 
167,823

 
165,751

 
 
 
165,751


(a) To exclude $9.3 million of stock-based compensation expense offset by $0.5 million of patent settlement income in the three months ended March 31, 2013.
(b) To exclude $7.2 million of stock-based compensation expense offset by $0.5 million of patent settlement income in the three months ended March 31, 2012.
(c) 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 March 31, 2013.
(d) 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 March 31, 2012.