SOURCE: Fortinet

Fortinet

July 25, 2012 16:15 ET

Fortinet Reports Second Quarter 2012 Financial Results

SUNNYVALE, CA--(Marketwire - Jul 25, 2012) - Fortinet® (NASDAQ: FTNT)

  • Revenues of $129.0 million, up 25% year over year
  • Billings of $145.8 million, up 32% year over year1
  • GAAP diluted net income per share of $0.08
  • Non-GAAP diluted net income per share of $0.121
  • Free cash flow of $41.3 million1
  • Cash, cash equivalents and investments of $644.4 million, with no debt

Fortinet® (NASDAQ: FTNT) -- a leader in high-performance network security -- today announced financial results for the second quarter ended June 30, 2012.

Financial Highlights for the Second Quarter of 2012

  • Revenue: Total revenue was $129.0 million for the second quarter of 2012, an increase of 25% compared to $103.0 million in the same quarter of 2011. Within total revenue, product revenue was $61.7 million, an increase of 32% compared to the same quarter of 2011. Services revenue was $65.4 million, an increase of 24% compared to the same quarter of 2011.

  • Billings1: Total billings were $145.8 million for the second quarter of 2012, an increase of 32% compared to $110.2 million in the same quarter of 2011.

  • Deferred Revenue: Deferred revenue was $331.4 million as of June 30, 2012, an increase of 21% compared to deferred revenue of $273.2 million as of June 30, 2011, and up $16.8 million from $314.6 million as of March 31, 2012.

  • Cash and Free Cash Flow1: As of June 30, 2012, cash, cash equivalents and investments were $644.4 million, compared to $600.3 million as of March 31, 2012. In the second quarter of 2012, free cash flow was $41.3 million.

  • GAAP Operating Income: GAAP operating income was $21.0 million for the second quarter of 2012, representing a GAAP operating margin of 16%. GAAP operating income was $18.8 million for the same quarter of 2011, representing a GAAP operating margin of 18%.

  • GAAP Net Income and Diluted Net Income Per Share: GAAP net income was $14.0 million for the second quarter of 2012, based on a 37% tax rate for the quarter. This compares to GAAP net income of $14.5 million for the same quarter of 2011, based on a 25% tax rate for the quarter. GAAP diluted net income per share was $0.08 for the second quarter of 2012, based on 166.1 million weighted-average diluted shares outstanding, compared to $0.09 for the same quarter of 2011, based on 163.9 million weighted-average diluted shares outstanding.

  • Non-GAAP Operating Income1: Non-GAAP operating income was $28.3 million for the second quarter of 2012, representing a non-GAAP operating margin of 22%. Non-GAAP operating income was $22.2 million for the same quarter of 2011, representing a non-GAAP operating margin of 22%.

  • Non-GAAP Net Income and Diluted Net Income Per Share1: Non-GAAP net income was $19.5 million for the second quarter of 2012, based on a 34% effective tax rate for the quarter. Non-GAAP net income for the same quarter of 2011 was $15.3 million, based on a 33% effective tax rate. Non-GAAP diluted net income per share was $0.12 for the second quarter of 2012 based on 166.1 million weighted-average diluted shares outstanding, compared to $0.09 for the same quarter of 2011, based on 163.9 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."

Management Commentary:

Ken Xie, founder, president and chief executive officer of Fortinet, stated: "Our strong performance in the second quarter highlights the demand for our network security offerings, which deliver unmatched performance and broad, flexible deployment options. We had healthy growth across all geographies and continued market share gains, especially with large U.S. enterprises. The momentum for Fortinet is high and we are excited about our technology roadmap for the second half of the year."

Ken Goldman, chief financial officer of Fortinet, stated: "We are very pleased with our second quarter results, particularly our ability to achieve billings growth of 32%, which is the strongest increase we've had since the first quarter of 2011. Our outperformance and ability to continue to grow more than twice the rate of our core market in challenging economic conditions is significant, and evidence that our vision and go-to-market strategy are working and our investments in the business are paying off."

Conference Call Details

Fortinet will host a conference call today, July 25, 2012, 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 # 99551686. 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 August 8, 2012, by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID# 99551686.

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 and investors 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 # 99562437. 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 August 8, 2012 by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID # 99562437.

About Fortinet (www.fortinet.com)

Fortinet (NASDAQ: FTNT) is a worldwide provider of network security appliances and the 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 the majority of the 2011 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 © 2012 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 forward-looking statements include statements regarding the momentum in our business, growth of our business and our product pipeline in 2012. 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; 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; 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; 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; competition and pricing pressure; 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 Generally Accepted Accounting Principles (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 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.  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 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 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 diluted net income per share. 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. 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 exclude from non-GAAP net income and non-GAAP diluted net income per share, the tax effects associated with stock-based compensation and the patent settlement. 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. We compensate 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)  
   
   
    June 30,     December 31,  
    2012     2011  
ASSETS                
CURRENT ASSETS:                
  Cash and cash equivalents   $ 81,226     $ 71,990  
  Short-term investments     320,403       318,283  
  Accounts receivable, net of allowance for doubtful accounts of $229 and $336, respectively     95,351       95,522  
  Inventory     20,828       16,249  
  Deferred tax assets     7,063       7,578  
  Prepaid expenses and other current assets     15,570       13,948  
    Total current assets     540,441       523,570  
PROPERTY AND EQUIPMENT-Net     10,247       7,966  
DEFERRED TAX ASSETS-Non-current     46,003       46,523  
LONG-TERM INVESTMENTS     242,769       148,414  
OTHER ASSETS     7,715       8,274  
TOTAL ASSETS   $ 847,175     $ 734,747  
LIABILITIES AND STOCKHOLDERS' EQUITY                
CURRENT LIABILITIES:                
  Accounts payable   $ 24,101     $ 19,768  
  Accrued liabilities     17,280       15,971  
  Accrued payroll and compensation     27,086       24,197  
  Deferred revenue     226,510       206,928  
    Total current liabilities     294,977       266,864  
DEFERRED REVENUE-Non-current     104,858       87,905  
OTHER LIABILITIES     20,696       21,624  
    Total liabilities     420,531       376,393  
STOCKHOLDERS' EQUITY:                
  Common stock     159       156  
  Additional paid-in capital     356,438       317,026  
  Treasury stock     (2,995 )     (2,995 )
  Accumulated other comprehensive income     1,154       402  
  Retained earnings     71,888       43,765  
    Total stockholders' equity     426,644       358,354  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 847,175     $ 734,747  
                 
                 
                 
FORTINET, INC.  
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  
(Unaudited, in thousands, except per share amounts)  
   
    Three Months Ended     Six Months Ended  
    June 30,   June 30,     June 30,   June 30,  
    2012   2011     2012   2011  
REVENUE:                            
  Product   $ 61,692   $ 46,687     $ 114,896   $ 86,852  
  Services     65,412     52,671       127,550     101,357  
  Ratable and other revenue     1,858     3,665       3,763     8,080  
    Total revenue     128,962     103,023       246,209     196,289  
COST OF REVENUE:                            
  Product 1     23,935     16,591       43,003     30,666  
  Services 1     12,467     8,596       23,680     16,377  
  Ratable and other revenue     725     1,371       1,487     2,931  
    Total cost of revenue     37,127     26,558       68,170     49,974  
GROSS PROFIT:                            
  Product     37,757     30,096       71,893     56,186  
  Services     52,945     44,075       103,870     84,980  
  Ratable and other revenue     1,133     2,294       2,276     5,149  
    Total gross profit     91,835     76,465       178,039     146,315  
OPERATING EXPENSES:                            
  Research and development 1     20,388     15,942       40,055     30,363  
  Sales and marketing 1     44,259     35,896       86,295     68,614  
  General and administrative 1     6,238     5,848       12,023     11,114  
    Total operating expenses     70,885     57,686       138,373     110,091  
OPERATING INCOME     20,950     18,779       39,666     36,224  
INTEREST INCOME     1,203     863       2,287     1,656  
OTHER INCOME (EXPENSE)-Net     73     (207 )     3     (302 )
INCOME BEFORE INCOME TAXES     22,226     19,435       41,956     37,578  
PROVISION FOR INCOME TAXES     8,276     4,941       13,833     9,497  
NET INCOME   $ 13,950   $ 14,494     $ 28,123   $ 28,081  
Net income per share:                            
  Basic   $ 0.09   $ 0.10     $ 0.18   $ 0.19  
  Diluted   $ 0.08   $ 0.09     $ 0.17   $ 0.17  
Weighted-average shares outstanding:                            
  Basic     157,474     152,267       156,742     151,293  
  Diluted     166,061     163,887       165,808     163,393  
                             
1 Includes stock-based compensation expense as follows:                            
  Cost of product revenue   $ 88   $ 43     $ 152   $ 65  
  Cost of services revenue     941     362       1,686     560  
  Research and development     2,292     985       4,249     1,438  
  Sales and marketing     3,475     1,681       6,918     3,581  
  General and administrative     1,056     799       2,093     1,296  
    $ 7,852   $ 3,870     $ 15,098   $ 6,940  
                             
                             
                             
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  
(Unaudited, in thousands)  
   
   
   
    Three Months Ended   Six Months Ended  
    June 30,     June 30,   June 30,     June 30,  
    2012     2011   2012     2011  
Net income   $ 13,950     $ 14,494   $ 28,123     $ 28,081  
Other comprehensive income:                              
  Foreign currency translation     (783 )     269     (225 )     923  
  Unrealized gains (losses) on investments     (326 )     159     1,473       154  
  Unrealized gains (losses) on cash flow hedges     19       -     19       (74 )
  Tax provision related to items of other comprehensive income     114       -     (515 )     -  
Net change in accumulated other comprehensive income     (976 )     428     752       1,003  
Comprehensive income   $ 12,974     $ 14,922   $ 28,875     $ 29,084  
                               
                               
                               
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  
(Unaudited, in thousands)  
   
   
    Six Months Ended  
    June 30,     June 30,  
    2012     2011  
CASH FLOWS FROM OPERATING ACTIVITIES:                
  Net income   $ 28,123     $ 28,081  
  Adjustments to reconcile net income to net cash provided by operating activities:                
    Depreciation and amortization     5,077       3,336  
    Loss on disposal of fixed assets     31       -  
    Amortization of investment premiums     6,528       6,291  
    Stock-based compensation     15,098       6,940  
    Excess tax benefits from employee stock option plans     (5,158 )     (4,491 )
    Changes in operating assets and liabilities:                
    Accounts receivable-net     (328 )     63  
    Inventory     (7,952 )     (1,455 )
    Deferred tax assets     520       (5,546 )
    Prepaid expenses and other current assets     (250 )     (1,000 )
    Other assets     886       (887 )
    Accounts payable     4,321       355  
    Accrued liabilities     910       3,660  
    Accrued payroll and compensation     2,998       357  
    Other liabilities     (1,014 )     3,170  
    Deferred revenue     36,502       20,544  
    Income taxes payable     5,744       14,826  
    Net cash provided by operating activities     92,036       74,244  
CASH FLOWS FROM INVESTING ACTIVITIES:                
  Purchases of investments     (355,025 )     (287,659 )
  Sales of investments     44,255       75,582  
  Maturities of investments     209,242       136,263  
  Purchases of property and equipment     (3,855 )     (1,450 )
  Payment made in connection with business acquisition     (550 )     (2,623 )
    Net cash used in investing activities     (105,933 )     (79,887 )
CASH FLOWS FROM FINANCING ACTIVITIES:                
  Proceeds from issuance of common stock     17,650       11,219  
  Excess tax benefit from employee stock option plans     5,158       4,491  
    Net cash provided by financing activities     22,808       15,710  
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS     325       1,093  
NET INCREASE IN CASH AND CASH EQUIVALENTS     9,236       11,160  
CASH AND CASH EQUIVALENTS-Beginning of period     71,990       66,859  
CASH AND CASH EQUIVALENTS-End of period   $ 81,226     $ 78,019  
                 
                 
                 
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  
    June 30,     June 30,  
    2012     2011  
Total revenue   $ 128,962     $ 103,023  
  Increase in deferred revenue     16,796       7,170  
Total billings (Non-GAAP)   $ 145,758     $ 110,193  
   
   
Reconciliation of net cash provided by operating activities to free cash flow  
   
   
      Three Months Ended  
      June 30,       June 30,  
      2012       2011  
Net cash provided by operating activities   $ 43,518     $ 34,068  
  Less purchases of property and equipment     (2,231 )     (756 )
Free cash flow (Non-GAAP)   $ 41,287     $ 33,312  
                 
                 
                 
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 June 30, 2012     Three Months Ended June 30, 2011  
    GAAP Results     Adjustments         Non-GAAP Results     GAAP Results     Adjustments           Non-GAAP Results  
Operating Income   $ 20,950     $ 7,374     (a)   $ 28,324     $ 18,779     $ 3,392     (b)     $ 22,171  
Operating Margin     16 %                 22 %     18 %                   22 %
              7,374     (a)                     3,392     (b)          
              (1,788 )   (c)                     (2,592 )   (c)          
Net Income   $ 13,950     $ 5,586         $ 19,536     $ 14,494     $ 800           $ 15,294  
Diluted net income per share   $ 0.08                 $ 0.12     $ 0.09                   $ 0.09  
Shares used in per share calculations-diluted     166,061                   166,061       163,887                     163,887  
                                                           
(a) To exclude $7.8 million of stock-based compensation expense offset by $0.5 million of patent settlement income in the three months ended June 30, 2012.
 
(b) To exclude $3.9 million of stock-based compensation expense offset by $0.5 million of patent settlement income in the three months ended June 30, 2011.
 
(c) To exclude the tax effects related to expenses noted in (a) and (b).
 
 
 

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