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Press Release
Investor & Media Contact:
Michelle Spolver
Fortinet, Inc.
408-486-7837
[email protected]
Fortinet Announces First Quarter 2010 Financial Results
• Billings of $79.4 million, up 32% year over year
• Revenues of $69.8 million, up 29% year over year
• Product revenue of $27.1 million, up 40% year over year
• GAAP EPS of $0.06
• Non-GAAP EPS of $0.08
• Free cash flow at a record $21 million
SUNNYVALE, Calif. – April 28, 2010 - Fortinet® (NASDAQ: FTNT) – a leading network
security provider and worldwide leader of unified threat management (UTM) solutions – today
announced financial results for the first quarter ended March 31, 2010.
Financial Highlights for the First Quarter of 2010
• Billings: Total billings were $79.4 million for the first quarter of 2010, an increase of
32% compared to the first quarter of 2009. We define billings as revenue recognized plus
the change in deferred revenue from the beginning to the end of the period.
• Revenue: Total revenue was $69.8 million for the first quarter of 2010, an increase of
29% compared to the first quarter of 2009. Within total revenue, product revenue was
$27.1 million, an increase of 40% compared to the first quarter of 2009. Services
revenue was $38.6 million, an increase of 22% compared to the first quarter of 2009.
Ratable product and services revenue was $4.1 million, an increase of 23% compared to
the first quarter of 2009.
• Deferred Revenue: Deferred revenue was $211.5 million as of March 31, 2010, an
increase of 19% compared to deferred revenue as of March 29, 2009, and up $9.6 million
from December 31, 2009.
• Cash and Cash Flow: As of March 31, 2010, cash, cash equivalents and investments
were $280.9 million, compared to $260.3 million as of December 31, 2009. Cash flow
from operations was $21.8 million for the first quarter of 2010, compared to $15.6
million for the first quarter of 2009. In the first quarter of 2010, free cash flow was $20.8
million, compared to $12.9 million for the first quarter of 2009. We define free cash flow,
a non-GAAP measure of liquidity, as net cash provided by operating activities less capital
expenditures.
• GAAP Operating Income: GAAP operating income was $6.7 million for the first
quarter of 2010, representing a GAAP operating margin of 10% and an increase of 108%
compared to the first quarter of 2009.
• Non-GAAP1 Operating Income: Non-GAAP operating income was $8.9 million for the
first quarter of 2010, representing a non-GAAP operating margin of 13% and an increase
of 85% compared to the first quarter of 2009. Non-GAAP operating income and
operating margin exclude stock-based compensation expense.
• GAAP Net Income and EPS: GAAP net income was $4.2 million for the first quarter of
2010, compared to $3.8 million for the first quarter of 2009. GAAP EPS was $0.06 based
on 74.9 million weighted-average diluted shares outstanding, compared to a loss of $0.07
based on 21.0 million weighted-average diluted shares outstanding for the first quarter of
2009. The loss per share was based on a net loss attributable to common stockholders of
$1.5 million (which includes a $5.2 million expense from the premium paid to repurchase
convertible preferred shares).
• Non-GAAP1 Net Income and EPS: Non-GAAP net income was $5.8 million for the
first quarter of 2010, based on a 35% tax rate. This compares to $5.4 million for the first
quarter of 2009, based on a 10% tax rate. Non-GAAP EPS was $0.08 for the first quarter
of 2010 based on 74.9 million weighted-average diluted shares outstanding, compared to
$0.08 in the first quarter of 2009 based on 65.9 million weighted-average diluted shares
outstanding. Non-GAAP net income and EPS exclude stock-based compensation
expense and the related tax effects.
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.”
Management Commentary:
Ken Xie, founder, president and chief executive officer of Fortinet, stated: “We are very pleased
with the company’s execution in the first quarter, which resulted in accelerated growth across
our targeted customer segments and across all geographic regions. We believe Fortinet’s
business momentum is being driven by our superior value proposition in unified threat
management, combined with growing traction for our complementary product portfolio and
ramping productivity related to our increased investments in the sales organization.”
Ken Goldman, chief financial officer of Fortinet, stated: “We reported solid results in the first
quarter, which met or exceeded our expectations across key metrics, including billings, revenue,
operating profitability and cash flow. Looking ahead, we will continue to invest in our business
to support growth as the economic environment improves. At the same time, we remain focused
on continuing to drive productivity improvements to deliver against our goals of long-term
operating margin expansion.”
Conference Call Details
Fortinet will host a conference call today, April 28, 2010, at 1:30 p.m. Pacific Time (4:30 p.m.
Eastern Time) to discuss the Company’s financial results. To access this call, dial (877) 303-
6913 (domestic) or (224) 357-2188 (international) with conference ID # 69537822. 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, 2010, by dialing (800) 642-1687 (domestic) or (706) 645-9291
(international). The replay passcode is 69537822.
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 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 # 69539155.
This follow-up call will be webcast live and accessible at http://investor.fortinet.com, and 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, 2010 at (800) 642-1687 (domestic) or (706)
645-9291 (international). The replay passcode is 69539155.
About Fortinet (www.fortinet.com)
Fortinet (NASDAQ: FTNT) is a worldwide provider of network security and unified threat
management (UTM) solutions. 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 2009 Fortune Global 100. Fortinet is
headquartered in Sunnyvale, Calif., with offices around the world.
# # #
Copyright © 2010 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 statements include statements regarding trends in accelerated growth across
our targeted customer segments and across all geographic regions, business momentum, the
growing traction of our product portfolio, ramping productivity, our increased investments in the
sales organization, our continued investment in the business, growth in sales as the economic
environment improves, our continued focus on driving productivity improvements, and our goal
of long-term operating margin expansion. Although Fortinet attempts 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;
uncertainty regarding increased business and renewals from existing customers; uncertainties
around continued success in sales growth; risks associated with successful implementation of
multiple integrated software products and other product functionality risks; execution risks
around new product introductions and innovation; the ability to attract and retain key personnel;
changes in strategy; risks associated with management of growth; lengthy sales and
implementation cycles, particularly in larger organizations; technological changes that make our
products and services less competitive; and the other risk factors set forth from time to time in
our 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 Fortinet's 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
Fortinet has provided in this release financial information that has not been prepared in
accordance with GAAP. Fortinet uses these non-GAAP financial measures internally in
analyzing its financial results and believes they are useful to investors, as a supplement to GAAP
measures, in evaluating Fortinet's ongoing operational performance. Fortinet believes 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 its financial results with other
companies in Fortinet's 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 measure 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. Fortinet considers 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 Fortinet’s business, and has historically represented a
majority of the quarterly revenue that Fortinet recognizes. 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, Fortinet may calculate
billings in a manner that is different from peer companies that report similar financial measures.
Management compensates for these limitations by providing specific information regarding
GAAP revenues 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 also 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 Fortinet 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 during the
period. Our 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 Quarterly Report on Form 10-Q and Annual Report on Form 10-K.
Fortinet has computed free cash flow using the same consistent method from quarter to quarter
and year to year.
Non-GAAP operating income and operating margin. We define non-GAAP operating income as
operating income plus stock-based compensation expense. Non-GAAP operating margin is
defined as non-GAAP operating income divided by revenue. Fortinet considers these non-GAAP
financial measures to be useful metrics for management and investors because they exclude the
effect of stock-based compensation expense so that Fortinet's management and investors can
compare Fortinet's 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 Fortinet's 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 EPS. We define non-GAAP net income as net income plus stock-
based compensation expense, less the related tax effects for both periods presented, and the
premium paid on repurchase of convertible preferred stock for the first quarter of 2009. We
define non-GAAP EPS as non-GAAP net income divided by the weighted-average outstanding
shares, on a fully-diluted basis. We consider these non-GAAP financial measures to be a useful
metric for management and investors for the same reasons that Fortinet uses non-GAAP
operating income and non-GAAP operating margin. However, in order to provide a complete
picture of our recurring core business operating results, we exclude from non-GAAP net income
and non-GAAP EPS the tax effects associated with stock-based compensation. Without
excluding these tax effects, investors would only see the gross effect that excluding these
expenses had on our operating results. The same limitations described above regarding Fortinet's
use of non-GAAP operating income and non-GAAP operating margin apply to our use of non-
GAAP net income and non-GAAP EPS. Management compensates for these limitations by
providing specific information regarding the GAAP amounts excluded from non-GAAP net
income and non-GAAP EPS and evaluating non-GAAP net income and non-GAAP EPS together
with net income and EPS calculated in accordance with GAAP.
FORTINET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
March 31, December 31,
ASSETS 2010 2009
CURRENT ASSETS:
Cash and cash equivalents $ 174,255 $ 212,458
Short-term investments 73,905 47,856
Accounts receivable, net of allowance for doubtful accounts of $303 and
$367, respectively 51,315 54,551
Inventory 9,867 10,649
Deferred tax asset 9,662 9,652
Prepaid expenses and other current assets 3,591 3,100
Deferred cost of revenues 3,958 3,951
Total current assets 326,553 342,217
PROPERTY AND EQUIPMENT — Net 6,663 6,387
DEFERRED COST OF REVENUES — Noncurrent 5,357 5,743
DEFERRED TAX ASSET — Noncurrent 31,671 31,671
OTHER ASSETS 1,188 1,195
LONG-TERM INVESTMENTS 32,777 -
TOTAL ASSETS $ 404,209 $ 387,213
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable $ 10,186 $ 10,987
Accrued liabilities 14,003 15,050
Accrued payroll and compensation 14,541 13,991
Deferred revenue — Current 145,140 140,537
Total current liabilities 183,870 180,565
DEFERRED REVENUE — Noncurrent 66,397 61,393
OTHER NON-CURRENT LIABILITIES 2,836 2,803
Total liabilities 253,103 244,761
STOCKHOLDERS’ EQUITY:
Common stock 68 67
Additional paid-in-capital 208,596 204,268
Treasury stock — common (2,995) (2,995)
Accumulated other comprehensive income 1,191 1,084
Accumulated deficit (55,754) (59,972)
Total stockholders’ equity 151,106 142,452
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 404,209 $ 387,213
FORTINET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended
March 31, 2010 March 29, 2009
REVENUE:
Product $ 27,110 $ 19,326
Services 38,625 31,573
Ratable product and services 4,060 3,295
Total revenue 69,795 54,194
COST OF REVENUE:
Product* 11,314 8,305
Services* 6,468 5,048
Ratable product and services 1,593 1,301
Total cost of revenue 19,375 14,654
GROSS PROFIT:
Product 15,796 11,021
Services 32,157 26,525
Ratable product and services 2,467 1,994
Total gross profit 50,420 39,540
OPERATING EXPENSES:
Research and development* 11,934 9,876
Sales and marketing* 26,723 21,763
General and administrative* 5,059 4,672
Total operating expenses 43,716 36,311
OPERATING INCOM E 6,704 3,229
INTEREST INCOM E 268 714
OTHER INCOM E (250) 494
INCOM E BEFORE INCOM E TAXES 6,722 4,437
PROVISION FOR INCOM E TAXES 2,504 663
NET INCOM E $ 4,218 $ 3,774
Premium paid on repurchase of convertible preferred shares - (5,231)
Net income (loss) attributable to common stockholders $ 4,218 $ (1,457)
Net income (loss) per share:
Basic $ 0.06 $ (0.07)
Diluted $ 0.06 $ (0.07)
Weighted-average shares outstanding:
Basic 67,181 20,960
Diluted 74,878 20,960
* Includes stock-based compensation expense as follows:
Cost of product revenue $ 24 $ 24
Cost of services revenue 208 124
Research and development 554 378
Sales and marketing 866 644
General and administrative 496 380
$ 2,148 $ 1,550
FORTINET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31, March 29,
2010 2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,218 $ 3,774
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,375 1,353
Amortization of investment premiums 1,090 269
Stock-based compensation 2,148 1,550
Excess tax benefit from employee stock option plans (795) -
Changes in operating assets and liabilities:
Accounts receivable — net 3,236 5,478
Inventory (27) 69
Deferred tax assets (10) -
Prepaid expenses and other current assets (529) (738)
Deferred cost of revenues 379 (169)
Other assets 3 174
Accounts payable (505) 341
Accrued liabilities (576) (919)
Accrued payroll and compensation 839 (1,313)
Deferred revenue 9,607 5,994
Income taxes payable 1,363 (292)
Net cash provided by operating activities 21,816 15,571
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (73,903) (46,393)
Maturities and sales of investments 13,945 33,950
Purchase of property and equipment (1,014) (2,625)
Net cash used in investing activities (60,972) (15,068)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 1,386 723
Offering costs paid in connection with Initial Public Offering (872) -
Repurchase of convertible preferred stock - (6,273)
Repurchase of common stock - (1,769)
Excess tax benefit from employee stock option plans 795 -
Net cash provided by (used in) financing activities 1,309 (7,319)
EFFECT OF EXCHANGE RATES ON CASH AND
CASH EQUIVALENTS (356) (240)
NET DECREASE IN CASH AND CASH EQUIVALENTS (38,203) (7,056)
CASH AND CASH EQUIVALENTS — Beginning of period 212,458 56,571
CASH AND CASH EQUIVALENTS — End of period $ 174,255 $ 49,515
Reconciliations of non-GAAP results of operations measures to the nearest comparable GAAP measures
(in thousands, except per share amounts)
(unaudited)
Three Months Ended
March 31, March 29,
2010 2009
Total revenue $ 69,795 $ 54,194
Increase in deferred revenue 9,607 5,994
Total billings (Non-GAAP) $ 79,402 $ 60,188
Three Months Ended
March 31, March 29,
2010 2009
Net cash provided by operating activities $ 21,816 $ 15,571
Less purchases of property and equipment (1,014) (2,625)
Free cash flow (Non-GAAP) $ 20,802 $ 12,946
Net cash used in investing activities* $ (60,972) $ (15,068)
Net cash provided by (used in) financing activities $ 1,309 $ (7,319)
*includes purchases of property and equipment.
Three Months Ended March 31, 2010 Three Months Ended March 29, 2009
GAAP Non-GAAP GAAP Non-GAAP
Results Adjustments Results Results Adjustments Results
Operating Income $ 6,704 2,148 (a) $ 8,852 $ 3,229 1,550 (b) $ 4,779
Operating Margin 9.6% 12.7% 6.0% 8.8%
2,148 (a) 1,550 (b)
(601) (c) 88 (c)
Net Income $ 4,218 1,547 $ 5,765 $ 3,774 1,638 $ 5,412
Premium paid on repurchase of convertible
preferred shares - - - (5,231) 5,231 (d) -
Net income (loss) attributable to common
stockholders $ 4,218 $ 5,765 $ (1,457) $ 5,412
Net Income (loss) per share - diluted $ 0.06 $ 0.08 $ (0.07) $ 0.08
Shares used in per share calculation - diluted 74,878 74,878 20,960 65,897
(a) To eliminate $2.1 million of stock-based compensation expense in the first quarter of 2010.
(b) To eliminate $1.6 million of stock-based compensation expense in the first quarter of 2009.
(c) To eliminate the tax effects related to expenses noted in (a) and (b).
(d) To adjust net income attributable to common shareholders for the premium paid on repurchase of convertible preferred stock.


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