Fortinet Announces Third Quarter 2010 Financial Results

(PresseBox) (Sunnyvale, ) Fortinet (NASDAQ: FTNT) - a leading network security provider and worldwide leader of unified threat management (UTM) solutions - today announced financial results for the third quarter ended September 30, 2010.

Financial Highlights for the Third Quarter of 2010

- Billings (1): Total billings were $94.7 million for the third quarter of 2010, an increase of 33% compared to the third quarter of 2009. 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.

- Revenue: Total revenue was $85.0 million for the third quarter of 2010, an increase of 29% compared to the third quarter of 2009. Within total revenue, product revenue was $35.9 million, an increase of 41% compared to the third quarter of 2009. Services revenue was $44.5 million, an increase of 21% compared to the third quarter of 2009.

Ratable product and services revenue was $4.5 million, an increase of 26% compared to the third quarter of 2009.

- Deferred Revenue: Deferred revenue was $235.3 million as of September 30, 2010, an increase of 24% compared to deferred revenue as of September 30, 2009, and up $9.7 million from June 30, 2010.

- Cash and Cash Flow: As of September 30, 2010, cash, cash equivalents and investments were $352.3 million, compared to $309.0 million as of June 30, 2010. Cash flow from operations was $32.2 million for the third quarter of 2010, compared to $15.9 million for the third quarter of 2009. In the third quarter of 2010, free cash flow was $31.5 million, compared to $14.6 million for the third quarter of 2009. We define free cash flow, a non-GAAP financial measure of liquidity, as net cash provided by operating activities less capital expenditures. (1)

- GAAP Operating Income: GAAP operating income was $18.2 million for the third quarter of 2010, representing a GAAP operating margin of 21% and an increase of 88% compared to the third quarter of 2009.

- Non-GAAP (1) Operating Income: Non-GAAP operating income was $20.6 million for the third quarter of 2010, representing a non-GAAP operating margin of 24% and an increase of 76% compared to the third quarter of 2009. Non-GAAP operating income and operating margin exclude stock-based compensation expense and, for the third quarter of 2009, non-cash asset acquisition related write-offs. Non-cash asset acquisition related write-offs consist of intangible assets that have no future value but exclude ongoing amortization of intangible assets that provide an ongoing benefit to our recurring operations.

- GAAP Net Income and EPS: GAAP net income was $14.0 million for the third quarter of 2010, based on tax expense of 23% of pre-tax income as a result of bringing the year-to-date effective tax rate to 29%. This compares to $7.9 million for the third quarter of 2009 based on a 21% tax rate. GAAP EPS was $0.18 for the third quarter of 2010, based on 77.9 million weighted-average diluted shares outstanding, compared to $0.10 for the third quarter of 2009, based on 64.2 million weighted-average diluted shares outstanding. GAAP EPS for the third quarter of 2009 was based on net income attributable to common stockholders of $6.4 million (after reducing net income by $1.5 million which was allocated to our participating preferred stock that converted into common stock at the time of our IPO).

- Non-GAAP (1) Net Income and EPS: Non-GAAP net income was $13.5 million for the third quarter of 2010, based on a 35% tax rate. This compares to $9.2 million of non-GAAP net income for the third quarter of 2009, based on a 24% tax rate. Non-GAAP EPS was $0.17 for the third quarter of 2010 based on 77.9 million weighted-average diluted shares outstanding, compared to $0.14 for the third quarter of 2009 based on 64.2 million weighted-average diluted shares outstanding. Non-GAAP net income excludes stock-based compensation expense, non-cash asset acquisition related write-offs (for the third quarter of 2009) and the related tax effects. Non-GAAP EPS for the third quarter of 2009 was based on non-GAAP net income of $9.2 million, which includes the income allocated to our participating preferred stock of $1.5 million.

Management Commentary

Ken Xie, founder, president and chief executive officer of Fortinet, stated: "Our ability to execute across all verticals and geographies drove our strong performance this quarter, as we once again proved to be the partner of choice for many large enterprises seeking a complete UTM solution. We continue to demonstrate our value proposition, gain market share, and grow our customer base. Furthermore, our focus on security innovation is yielding tangible results, as the introduction of new cutting edge solutions, including our highly differentiated FortiGate-3950B, FortiGate-1240B and FortiAP appliances are resonating well with our customers and further differentiating us in the market."

Ken Goldman, chief financial officer of Fortinet, stated: "We are very pleased with our third quarter results, which marks the fourth consecutive quarter as a publicly traded company that we have exceeded our expectations in terms of billings, revenue and profitability. We are excited about the momentum in our business and the robust demand for network security and UTM solutions, and will continue to invest significantly in the near term to strengthen our sales and support infrastructure, as well as our research and development capabilities in order to support our growth."

Conference Call Details

Fortinet hosted a conference call on October 21, 2010, at 1:30 p.m. Pacific Time (4:30 p.m. Eastern Time) to discuss the Company's financial results. 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/.... A replay of this conference call can also be accessed through November 4, 2010, by dialing (800) 642-1687 (domestic) or (706) 645-9291 (international). The replay passcode is 16168970.

Following Fortinet's earnings conference call, the Company hosted 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. 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/.... A replay of this conference call will also be available through November 4, 2010 at (800) 642-1687 (domestic) or (706) 645-9291 (international). The replay passcode is 16170554.

(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."

Forward-looking Statements

This press release contains forward-looking statements that involve risks and uncertainties. These forward-looking statements include statements regarding our continued growth in market share and customer acquisitions, business momentum and demand for network security and UTM solutions and our plans to invest to strengthen our sales and support infrastructure and our research and development capabilities to support growth. 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; 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; 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 http://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 and non-cash asset acquisition related write-offs for the third quarter of 2009. Non-cash asset acquisition related write-offs include intangible assets that have no future value but exclude ongoing amortization of intangible assets that provide an ongoing benefit to our recurring operations. 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 and non-cash asset acquisition related write-offs (for the third quarter of 2009), less the related tax effects for both periods presented. We define non-GAAP EPS as non-GAAP net income divided by the weighted-average outstanding shares, on a fully-diluted basis and, for the third quarter of 2009, we define non-GAAP EPS as including the premium paid on the repurchase of convertible preferred stock and income allocated to participating securities before dividing that amount 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 and, for the third quarter of 2009, the non-cash asset acquisition related write-offs. We used a 35 percent effective tax rate to calculate non-GAAP net income for the third quarter of 2010. We believe the 35 percent effective tax rate is a reasonable estimate of a long-term normalized tax rate under our global operating structure. Our effective tax rate for the third quarter of 2009 was 24 percent which reflects only our foreign tax provision as our US operations had net operating losses to offset any taxable income. 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 GmbH

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.

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