Fortinet Reports Second Quarter 2011 Financial Results

Ken Xie, Founder, President und CEO, Fortinet
(PresseBox) ( Sunnyvale, Calif., )
.
- Revenues of $103.0 million, up 35% year over year(1)
- Billings of $110.2 million, up 22% year over year
- GAAP EPS and Non-GAAP EPS of $0.09(2)
- Cash and investments of $468.5 million, with no debt
- Free cash flow of $33.3 million, up 99% year over year
- GAAP net income of $14.5 million, up 111% year over year
- Non-GAAP net income of $15.3 million, up 88% year over year

Fortinet® (NASDAQ: FTNT) - a leading network security provider and the worldwide leader in unified threat management (UTM) solutions - today announced financial results for the second quarter ended June 30, 2011.

Financial Highlights for the Second Quarter of 2011

- Revenue(1): Total revenue was $103.0 million for the second quarter of 2011, an increase of 35% compared to the second quarter of 2010. Within total revenue, product revenue was $46.7 million, an increase of 50% compared to the second quarter of 2010. Services revenue was $52.7 million, an increase of 29% compared to the second quarter of 2010. Ratable product and services revenue was $3.7 million, a decrease of 15% compared to the second quarter of 2010.

- Billings(3): Total billings were $110.2 million for the second quarter of 2011, an increase of 22% compared to the second quarter of 2010. We define billings, a non-GAAP financial measure, as revenue recognized during the period plus the change in deferred revenue from the beginning to the end of the period.

- Deferred Revenue: Deferred revenue was $273.2 million as of June 30, 2011, an increase of 21% compared to deferred revenue as of June 30, 2010, and up $7.2 million from March 31, 2011.

- Cash and Cash Flow: As of June 30, 2011, cash, cash equivalents and investments were $468.5 million, compared to $432.7 million as of March 31, 2011. Cash flow from operations was $34.1 million for the second quarter of 2011, compared to $18.0 million for the second quarter of 2010. In the second quarter of 2011, free cash flow was $33.3 million, compared to $16.7 million for the second quarter of 2010. We define free cash flow, a non-GAAP financial measure of liquidity, as net cash provided by operating activities less capital expenditures.3

- GAAP Operating Income: GAAP operating income was $18.8 million for the second quarter of 2011, representing a GAAP operating margin of 18%, and an increase of 92% compared to the second quarter of 2010.

- Non-GAAP(3) Operating Income: Non-GAAP operating income was $22.2 million for the second quarter of 2011, representing a non-GAAP operating margin of 22%, and an increase of 84% compared to the second quarter of 2010. Non-GAAP operating income and operating margin exclude stock-based compensation expense and income from payments we received related to a patent settlement.

- GAAP Net Income and EPS: GAAP net income was $14.5 million for the second quarter of 2011, based on a 25% tax rate for the quarter. This compares to GAAP net income of $6.9 million for the second quarter of 2010, based on a 33% tax rate for the quarter. GAAP diluted EPS was $0.09 for the second quarter of 2011, based on 163.9 million weighted-average diluted shares outstanding, compared to $0.05 for the second quarter of 2010, based on 151.3 million weighted-average diluted shares outstanding.

- Non-GAAP(3) Net Income and EPS: Non-GAAP net income was $15.3 million for the second quarter of 2011, based on a 33% tax rate for the quarter. Non-GAAP net income for the second quarter of 2010 was $8.1 million, based on a 35% tax rate. Non-GAAP diluted EPS was $0.09 for the second quarter of 2011 based on 163.9 million weighted-average diluted shares outstanding, compared to $0.05 for the second quarter of 2010 based on 151.3 million weighted-average diluted shares outstanding. Non-GAAP net income and non-GAAP EPS exclude stock-based compensation expense, income from payments we received related to a patent settlement and the related tax effects.

(1) Effective January 1, 2011, we prospectively adopted the Financial Accounting Standards Board's new accounting standards related to software revenue recognition for applicable transactions originating or materially modified after December 31, 2010.

(2) Effective June 1, 2011, we completed a two-for-one stock split of our outstanding shares of common stock. All shares and per share amounts in this release have been retroactively adjusted to reflect the stock split for all periods presented.

(3) 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: "Our second quarter performance highlights the underlying strength of our technology, the successful execution of our vertically focused go-to-market sales strategy, and the healthy growth in the global UTM market. We continued to penetrate larger enterprises and services provider customers, with notable strength in the Americas and Asia Pacific region. With a healthy pipeline of business and an exciting product launch lineup slated for the second half of the year, we are positioned to continue to gain market share, as enterprises look to deploy high performance UTM solutions."

Ken Goldman, chief financial officer of Fortinet, stated: "We reported a solid second quarter with strong financial metrics that were at or above the high-end of our previously provided guidance. We had particularly strong growth in revenue, profitability, and cash flow generation, and ended the quarter with a cash balance of more than $468 million. We are confident as we enter the second half of 2011, and remain focused on further penetrating the enterprise market, delivering innovative new products, and expanding our sales and R&D personnel. We expect that this, along with a healthy network security market, will enable us to grow our global business and maintain our technology advantage."

Conference Call Details

Fortinet will host a conference call today, July 19, 2011, 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 # 82808820. A live webcast of the conference call and supplemental slides will be accessible from the Investor Relations page of our website at: http://investor.fortinet.com, and a replay will be archived and accessible at: http://investor.fortinet.com/.... A replay of this conference call can also be accessed through August 2, 2011, by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID# 82808820.

Following our earnings conference call, we 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 # 82809250. This follow-up call will be webcast live and accessible at http://investor.fortinet.com, and a replay will be archived and accessible at http://investor.fortinet.com/.... A replay of this conference call can also be accessed through August 2, 2011, by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID # 82809250.

Copyright © 2011 Fortinet, Inc. All rights reserved. The symbols ® 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, FortiAP, FortiDB and FortiWeb. Other trademarks belong to their respective owners. Fortinet has not independently verified statements or certifications herein attributed to third parties and Fortinet does not independently endorse such statements.

Forward-looking Statements

This press release contains forward-looking statements that involve risks and uncertainties. These forward-looking statements include statements regarding the momentum in our business and the sales pipeline, expected product introductions, our positioning to continue to grow and gain market share, continued demand for UTM solutions by enterprises and service providers, and our commitment to invest in our sales and R&D organizations to expand our global reach and maintain our technology edge in the market. 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; 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 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; risks associated with the adoption of, and demand for, the UTM model in general and by specific customer segments; 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 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 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 its 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. 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 peer 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 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. 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. We have 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 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 EPS. 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, less the related tax effects for both periods presented. We define non-GAAP EPS as non-GAAP net income divided by the weighted-average shares outstanding, 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 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 exclude from non-GAAP net income and non-GAAP EPS the tax effects associated with stock-based compensation and the patent settlement. We used a 33 percent effective tax rate to calculate non-GAAP net income for the second quarter of 2011. We used a 35 percent effective tax rate to calculate non-GAAP net income for the second quarter of 2010. We believe these effective tax rates 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 EPS. We compensate 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.
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