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Fortinet Reports Third Quarter 2013 Financial Results


Fortinet Reports Third Quarter 2013 Financial Results

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


 
--  Billings of $165.2 million, up 14% year over year(1)
--  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 $0.12(1)
--  Cash flow from operations of $25.4 million
--  Free cash flow of $22.2 million(1)
--  Cash, cash equivalents and investments of $841.0 million, with no debt

Fortinet(R) (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


 
--  Billings(1): 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 million(1).
    
    
--  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-GAAPOperating Income(1): 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-GAAPNet Income and Diluted Net Income Per Share(1): 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 Copyright 2013 Fortinet, Inc. All rights reserved. The symbols (R) and (TM) 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    September    September    September  
                             30,          30,          30,          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     September     September     September  
                          30,           30,           30,           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 com
pensation                   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      September  
                                                     30,            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    Three Months Ended September  
                        30, 2013                        30, 2012            
             ------------------------------  ------------------------------ 
               GAAP                Non-GAAP    GAAP                Non-GAAP 
              Results Adjustments  Results   Results  Adjustments  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

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