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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from              to             
Commission file number: 001-34511
______________________________________
FORTINET, INC.
(Exact name of registrant as specified in its charter)
______________________________________

Delaware77-0560389
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

899 Kifer Road
Sunnyvale, California 94086
(Address of principal executive offices, including zip code)

(408) 235-7700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Common Stock, $0.001 Par ValueFTNTThe Nasdaq Stock Market LLC
(Title of each class)(Trading Symbol)(Name of exchange on which registered)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes    No   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 


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Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes       No  
As of July 31, 2020, there were 161,831,584 shares of the registrant’s common stock outstanding.




FORTINET, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended June 30, 2020
Table of Contents
 
  Page
PART IFINANCIAL INFORMATION
Item 1.
Item 2.
Item 3.
Item 4.
PART II—OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 6.





Table of Contents
PART I—FINANCIAL INFORMATION

ITEM 1.  Financial Statements
FORTINET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in millions, except per share amounts)
 June 30,
2020
December 31,
2019
ASSETS
CURRENT ASSETS:
Cash and cash equivalents$916.4  $1,222.5  
Short-term investments610.5  843.1  
Accounts receivable—net498.7  544.3  
Inventory126.0  117.9  
Prepaid expenses and other current assets57.1  41.2  
Total current assets2,208.7  2,769.0  
LONG-TERM INVESTMENTS100.4  144.3  
PROPERTY AND EQUIPMENT—NET392.6  344.3  
DEFERRED CONTRACT COSTS263.5  237.0  
DEFERRED TAX ASSETS218.9  232.6  
GOODWILL67.2  67.2  
OTHER INTANGIBLE ASSETS—NET23.4  31.1  
OTHER ASSETS55.9  60.0  
TOTAL ASSETS$3,330.6  $3,885.5  
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable$107.2  $96.4  
Accrued liabilities118.2  101.8  
Accrued payroll and compensation110.7  101.8  
Deferred revenue1,275.8  1,173.6  
Total current liabilities1,611.9  1,473.6  
DEFERRED REVENUE1,047.0  962.3  
INCOME TAX LIABILITIES77.3  82.8  
OTHER LIABILITIES50.5  44.9  
Total liabilities2,786.7  2,563.6  
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS’ EQUITY:
Common stock, $0.001 par value—300 shares authorized; 161.8 and 171.7 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively
0.2  0.2  
Additional paid-in capital1,154.3  1,180.3  
Accumulated other comprehensive income2.5  1.1  
Retained earnings (accumulated deficit)(613.1) 140.3  
Total stockholders’ equity543.9  1,321.9  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$3,330.6  $3,885.5  
See notes to condensed consolidated financial statements.
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FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited, in millions, except per share amounts)
 Three Months EndedSix Months Ended
June 30,
2020
June 30,
2019
June 30,
2020
June 30,
2019
REVENUE:
Product$211.9  $189.9  $404.2  $352.6  
Service 403.6  331.8  788.2  641.7  
Total revenue615.5  521.7  1,192.4  994.3  
COST OF REVENUE:
Product84.4  82.7  160.7  152.9  
Service 50.7  45.6  103.1  88.4  
Total cost of revenue135.1  128.3  263.8  241.3  
GROSS PROFIT:
Product127.5  107.2  243.5  199.7  
Service 352.9  286.2  685.1  553.3  
Total gross profit480.4  393.4  928.6  753.0  
OPERATING EXPENSES:
Research and development82.1  67.4  162.4  136.0  
Sales and marketing253.8  226.5  513.8  442.4  
General and administrative28.9  24.3  57.7  48.8  
Gain on intellectual property matter(1.1)   (37.9)   
Total operating expenses363.7  318.2  696.0  627.2  
OPERATING INCOME116.7  75.2  232.6  125.8  
INTEREST INCOME—NET4.0  11.0  13.2  21.2  
OTHER INCOME (EXPENSE)—NET0.9  (0.4) (7.1) (0.9) 
INCOME BEFORE INCOME TAXES121.6  85.8  238.7  146.1  
PROVISION FOR INCOME TAXES9.5  13.1  22.6  14.6  
NET INCOME$112.1  $72.7  $216.1  $131.5  
Net income per share (Note 8):
Basic$0.69  $0.42  $1.30  $0.77  
Diluted$0.68  $0.42  $1.27  $0.75  
Weighted-average shares outstanding:
Basic161.6  171.1  166.1  170.6  
Diluted165.4  175.1  169.8  175.0  
See notes to condensed consolidated financial statements.
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FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in millions)
 Three Months EndedSix Months Ended
 June 30,
2020
June 30,
2019
June 30,
2020
June 30,
2019
Net income$112.1  $72.7  $216.1  $131.5  
Other comprehensive income:
Change in unrealized gains on investments7.3  1.5  2.1  2.5  
Less: tax provision related to change in unrealized gains on investments1.7  0.4  0.7  0.7  
Other comprehensive income5.6  1.1  1.4  1.8  
Comprehensive income$117.7  $73.8  $217.5  $133.3  
See notes to condensed consolidated financial statements.
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FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited, in millions)
Three Months Ended June 30, 2020
 Common StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive Income (Loss)
Accumulated DeficitTotal
Stockholders’
Equity
SharesAmount
BALANCE—March 31, 2020162.6  $0.2  $1,128.4  $(3.1) $(589.2) $536.3  
Issuance of common stock in connection with equity incentive plans - net of tax withholding0.6  —  (12.9) —  —  (12.9) 
Repurchase and retirement of common stock(1.4) —  (10.1) —  (136.0) (146.1) 
Stock-based compensation expense—  —  48.9  —  —  48.9  
Net unrealized gain on investments - net of tax—  —  —  5.6  —  5.6  
Net income—  —  —  —  112.1  112.1  
BALANCE—June 30, 2020161.8  $0.2  $1,154.3  $2.5  $(613.1) $543.9  
Three Months Ended June 30, 2019
 Common StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive Income (Loss)
Accumulated DeficitTotal
Stockholders’
Equity
SharesAmount
BALANCE—March 31, 2019170.7  $0.2  $1,108.1  $(0.2) $(50.0) $1,058.1  
Issuance of common stock in connection with equity incentive plans - net of tax withholding0.8  —  (19.9) —  —  (19.9) 
Repurchase and retirement of common stock(0.5) —  (3.0) —  (31.7) (34.7) 
Stock-based compensation expense—  —  45.0  —  —  45.0  
Net unrealized gain on investments - net of tax—  —  —  1.1  —  1.1  
Net income—  —  —  —  72.7  72.7  
BALANCE—June 30, 2019171.0  $0.2  $1,130.2  $0.9  $(9.0) $1,122.3  

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Six Months Ended June 30, 2020
Common StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive Income
Retained Earnings (Accumulated Deficit)Total
Stockholders’
Equity
SharesAmount
BALANCE—December 31, 2019171.7  $0.2  $1,180.3  $1.1  $140.3  $1,321.9  
Issuance of common stock in connection with equity incentive plans - net of tax withholding1.5  —  (43.2) —  —  (43.2) 
Repurchase and retirement of common stock(11.4) —  (76.5) —  (969.5) (1,046.0) 
Stock-based compensation expense—  —  93.7  —  —  93.7  
Net unrealized gain on investments - net of tax—  —  —  1.4  —  1.4  
Net income—  —  —  —  216.1  216.1  
BALANCE—June 30, 2020161.8  $0.2  $1,154.3  $2.5  $(613.1) $543.9  
Six Months Ended June 30, 2019
Common StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive Income (Loss)
Accumulated DeficitTotal
Stockholders’
Equity
SharesAmount
BALANCE—December 31, 2018169.8  $0.2  $1,068.3  $(0.8) $(57.5) $1,010.2  
Issuance of common stock in connection with equity incentive plans - net of tax withholding2.5  —  (18.3) —  —  (18.3) 
Repurchase and retirement of common stock(1.3) —  (7.8) —  (83.1) (90.9) 
Stock-based compensation expense—  —  88.0  —  —  88.0  
Cumulative-effect adjustment from adoption of ASU 2018-02(0.1) 0.1    
Net unrealized gain on investments - net of tax—  —  —  1.8  —  1.8  
Net income—  —  —  —  131.5  131.5  
BALANCE—June 30, 2019171.0  $0.2  $1,130.2  $0.9  $(9.0) $1,122.3  
See notes to condensed consolidated financial statements.
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FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in millions)
 Six Months Ended
 June 30,
2020
June 30,
2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income$216.1  $131.5  
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation93.7  88.0  
Amortization of deferred contract costs64.5  51.0  
Depreciation and amortization35.4  30.9  
Amortization of investment premiums (discounts)(0.4) (3.0) 
Other 5.5  0.5  
Changes in operating assets and liabilities:
Accounts receivable—net44.5  41.5  
Inventory(17.9) (5.5) 
Prepaid expenses and other current assets(15.2) (5.4) 
Deferred contract costs(91.1) (72.4) 
Deferred tax assets13.0  (4.4) 
Other assets0.7  2.4  
Accounts payable9.7  (14.6) 
Accrued liabilities6.5  (13.1) 
Accrued payroll and compensation8.9  (7.9) 
Other liabilities5.6  (2.8) 
Deferred revenue186.9  179.7  
Net cash provided by operating activities566.4  396.4  
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments(399.3) (748.1) 
Sales of investments130.0  15.1  
Maturities of investments548.1  384.9  
Purchases of property and equipment(58.5) (27.5) 
Payments made in connection with business combination, net of cash acquired(3.1)   
Other(0.4)   
Net cash provided by (used in) investing activities216.8  (375.6) 
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase and retirement of common stock(1,046.0) (94.2) 
Proceeds from issuance of common stock15.7  39.6  
Taxes paid related to net share settlement of equity awards(58.9) (56.5) 
Other(0.1)   
Net cash used in financing activities(1,089.3) (111.1) 
NET DECREASE IN CASH AND CASH EQUIVALENTS(306.1) (90.3) 
CASH AND CASH EQUIVALENTS—Beginning of period1,222.5  1,112.4  
CASH AND CASH EQUIVALENTS—End of period$916.4  $1,022.1  
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Operating lease liabilities arising from obtaining right-of-use assets$5.9  $4.9  
Cash paid to settle liability incurred for repurchase of common stock$  $4.2  
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfers of evaluation units from inventory to property and equipment$10.2  $9.9  
Liability for purchase of property and equipment$24.9  $9.9  
Liability incurred for repurchase of common stock$  $1.0  
See notes to condensed consolidated financial statements.
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FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Preparation—The unaudited condensed consolidated financial statements of Fortinet, Inc. and its wholly owned subsidiaries (collectively, “we,” “us” or “our”) have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information, as well as the instructions to Form 10-Q pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements, and should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2019, contained in our Annual Report on Form 10-K filed with the SEC on February 26, 2020. In the opinion of management, all adjustments, which includes normal recurring adjustments, considered necessary for a fair presentation have been included. All intercompany balances, transactions and cash flows have been eliminated. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results for the full year or for any future periods. The condensed consolidated balance sheet as of December 31, 2019 is derived from the audited consolidated financial statements for the year ended December 31, 2019. For 2020, the amounts previously reported as Income taxes payable are included in Accrued liabilities. Prior periods have been reclassified to conform with current period presentation.

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

There have been no material changes to our significant accounting policies as of and for the three and six months ended June 30, 2020.

Recently Adopted Accounting Standards

Financial Instruments

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13—Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“Topic 326”), which provides guidance on how an entity should measure credit losses on financial instruments. The standard replaces the existing incurred loss model with an expected credit loss model for financial assets measured at amortized cost, including trade receivables, and requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down. The new approach to estimating credit losses (referred to as the current expected credit losses model) generally accelerates recognition of credit losses. We adopted Topic 326 on January 1, 2020 using the modified retrospective method. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

Cloud Computing

In August 2018, the FASB issued ASU 2018-15—Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification (“ASC”) Topic 350, Intangibles—Goodwill and Other, to determine which implementation costs to capitalize as assets or expense as incurred. We adopted ASU 2018-15 on January 1, 2020. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

Fair Value Measurements

In August 2018, the FASB issued ASU 2018-13—Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements in ASC 820, Fair Value Measurement, as part of its disclosure framework project. We adopted ASU 2018-13 on January 1, 2020. The adoption of this standard did not have a material impact on our disclosures.

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FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

        Recent Accounting Standards Not Yet Effective

Income Taxes

In December 2019, the FASB issued ASU 2019-12—Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application and simplification of GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for us beginning on January 1, 2021. We are currently evaluating the impact of ASU 2019-12 on our condensed consolidated financial statements.

2.  REVENUE RECOGNITION

Our revenue consists of product and service revenue. Product revenue is generated by sales of our FortiGate products and other hardware and software solutions. Service revenue relates to sales of our security subscription services, which mainly consist of our FortiGuard security solutions, as well as our FortiCare technical support services and other services.

Disaggregation of Revenue

The following table presents our revenue disaggregated by major product and service lines (in millions):
Three Months EndedSix Months Ended
June 30,
2020
June 30,
2019
June 30,
2020
June 30,
2019
Product$211.9  $189.9  $404.2  $352.6  
Service:
Security subscription222.6  183.1  434.0  352.7  
Technical support and other181.0  148.7  354.2  289.0  
Total service revenue403.6  331.8  788.2  641.7  
Total revenue$615.5  $521.7  $1,192.4  $994.3  

Deferred Revenue

During the three months ended June 30, 2020 and June 30, 2019, we recognized $307.9 million and $252.0 million in service revenue that was included in the deferred revenue balance as of December 31, 2019 and December 31, 2018, respectively. During the six months ended June 30, 2020 and June 30, 2019, we recognized $656.8 million and $540.6 million in service revenue that was included in the deferred revenue balance as of December 31, 2019 and December 31, 2018, respectively.

Transaction Price Allocated to the Remaining Performance Obligations

As of June 30, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $2.32 billion, which was substantially comprised of deferred security subscription and technical support services revenue. We expect to recognize approximately $1.28 billion as revenue over the next 12 months and the remainder thereafter.

Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount. On January 1, 2020, we adopted Topic 326, which provides guidance on how to measure credit losses on financial instruments, including accounts receivable. Prior to our adoption of Topic 326, our accounts receivable balance was reduced by an allowance for doubtful accounts that we determined based on our assessment of the collectability of customer accounts. Under Topic 326, our accounts receivable balance is reduced by an allowance for credit losses. We measure expected credit losses of accounts receivable on a collective (pool) basis, aggregating accounts receivable that are either current or no more than 60 days past due, and aggregating accounts receivable that are more than 60 days past due. We apply a credit-loss percentage to each of the pools that is based on our historical credit losses. We review whether each of our significant accounts receivable that is more than 60 days past due
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FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

continues to exhibit similar risk characteristics with the other accounts receivable in the pool. If we determine that it does not, we evaluate it for expected credit losses on an individual basis.

The COVID-19 pandemic and the recent economic downturn prompted us to perform additional credit reviews of our existing customers, including obtaining recent credit reports and reviewing their latest available statements of financial position. In addition, we have seen an increase in requests for extended payment terms. After performing our additional reviews, we increased the allowance for credit losses for certain accounts receivable.

The allowance for credit losses was $2.2 million as of June 30, 2020, and the allowance for doubtful accounts was $1.2 million as of December 31, 2019. Provisions, write-offs and recoveries were not material during the six months ended June 30, 2020.

Deferred Contract Costs

Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. The amortization of deferred contract costs is included in sales and marketing expense in our condensed consolidated statements of income. Amortization of deferred contract costs during the three months ended June 30, 2020 and June 30, 2019 were $33.2 million and $25.9 million, respectively. Amortization of deferred contract costs during the six months ended June 30, 2020 and June 30, 2019 were $64.5 million and $51.0 million, respectively.

3.  FINANCIAL INSTRUMENTS AND FAIR VALUE

The following tables summarize our investments (in millions):
 
 June 30, 2020
 Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
Corporate debt securities$502.2  $3.0  $(0.1) $505.1  
Commercial paper75.6  0.2    75.8  
Certificates of deposit and term deposits (1)
69.0  0.1  (0.1) 69.0  
U.S. government securities60.8  0.2    61.0  
Total available-for-sale securities$707.6  $3.5  $(0.2) $710.9  
 December 31, 2019
 Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
Corporate debt securities$576.1  $1.0  $(0.1) $577.0  
Commercial paper148.7  0.1    148.8  
Certificates of deposit and term deposits (1)
66.4      66.4  
U.S. government securities195.0  0.2    195.2  
Total available-for-sale securities$986.2  $1.3  $(0.1) $987.4  
(1) The majority of our certificates of deposit and term deposits are foreign deposits.

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FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following tables show the gross unrealized losses and the related fair values of our investments that have been in a continuous unrealized loss position (in millions):
June 30, 2020
 Less Than 12 Months12 Months or GreaterTotal
 Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses