Fortinet Reports First Quarter 2013 Financial Results

Marketwired

SUNNYVALE, CA--(Marketwired - Apr 30, 2013) - Fortinet® (NASDAQ: FTNT)

  • Revenues of $135.8 million, up 16% year over year
  • Billings of $148.5 million, up 8% year over year1
  • GAAP diluted net income per share of $0.07
  • Non-GAAP diluted net income per share of $0.101
  • Cash flow from operations of $37.7 million
  • Free cash flow of $36.1 million1
  • Cash, cash equivalents and investments of $782.5 million, with no debt

Fortinet® (NASDAQ: FTNT) -- a leader in high-performance network security -- today announced financial results for the first quarter ended March 31, 2013.

Financial Highlights for the First Quarter of 2013

  • Revenue: Total revenue was $135.8 million for the first quarter of 2013, an increase of 16% compared to $117.2 million in the same quarter of 2012. Within total revenue, product revenue was $58.0 million, an increase of 9% compared to the same quarter of 2012. Services revenue was $75.9 million, an increase of 22% compared to the same quarter of 2012.

  • Billings1: Total billings were $148.5 million for the first quarter of 2013, an increase of 8% compared to $137.0 million in the same quarter of 2012.

  • Deferred Revenue: Deferred revenue was $376.4 million as of March 31, 2013, an increase of 20% compared to deferred revenue of $314.6 million as of March 31, 2012, and up $13.2 million from $363.2 million as of December 31, 2012.

  • Cash and Cash Flow1: As of March 31, 2013, cash, cash equivalents and investments were $782.5 million, compared to $739.6 million as of December 31, 2012. In the first quarter of 2013, cash flow from operations was $37.7 million and free cash flow was $36.1 million.

  • GAAP Operating Income1: GAAP operating income was $15.4 million for the first quarter of 2013, representing a GAAP operating margin of 11%. GAAP operating income was $18.7 million for the same quarter of 2012, representing a GAAP operating margin of 16%.

  • GAAP Net Income and Diluted Net Income Per Share1: GAAP net income was $12.2 million for the first quarter of 2013, based on a 28% tax rate for the quarter. This compares to GAAP net income of $14.2 million for the same quarter of 2012, based on a 28% tax rate for the quarter. GAAP diluted net income per share was $0.07 for the first quarter of 2013, based on 167.8 million weighted-average diluted shares outstanding, compared to $0.09 for the same quarter of 2012, based on 165.8 million weighted-average diluted shares outstanding.

  • Non-GAAP Operating Income1: Non-GAAP operating income was $24.2 million for the first quarter of 2013, representing a non-GAAP operating margin of 18%. Non-GAAP operating income was $25.5 million for the same quarter of 2012, representing a non-GAAP operating margin of 22%.

  • Non-GAAP Net Income and Diluted Net Income Per Share1: Non-GAAP net income was $17.3 million for the first quarter of 2013, based on a 33% effective tax rate for the quarter. Non-GAAP net income for the same quarter of 2012 was $17.5 million, based on a 34% effective tax rate. Non-GAAP diluted net income per share was $0.10 for the first quarter of 2013 based on 167.8 million weighted-average diluted shares outstanding, compared to $0.11 for the same quarter of 2012, based on 165.8 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."

"While we performed well in Asia Pacific and the U.S. enterprise sector, our first quarter results were affected primarily by macroeconomic and geopolitical challenges in Latin America and EMEA, a shortfall in U.S service provider business, and to a lesser extent some inventory shortages and product transition issues," said Ken Xie, founder, president and chief executive officer. "Given the macro uncertainty, we are moving forward cautiously yet confidently, as the network security market remains healthy and Fortinet's competitive position and product advantage remains strong."

Conference Call Details
Fortinet will host a conference call today, April 30, 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 # 34804106. 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, 2013, by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID# 34804106.

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 # 34804106. 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 May 7, 2013 by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID # 34804106.

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 the 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 © 2013 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 potential growth of our business. 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 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). 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 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, 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 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. 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)  
             
    March 31,     December 31,  
    2013     2012  
ASSETS                
CURRENT ASSETS:                
  Cash and cash equivalents   $ 97,384     $ 122,975  
  Short-term investments     362,996       290,719  
  Accounts receivable-Net     102,359       107,642  
  Inventory     23,933       21,060  
  Prepaid expenses and other current assets     26,988       26,878  
    Total current assets     613,660       569,274  
PROPERTY AND EQUIPMENT-Net     25,803       25,638  
LONG-TERM INVESTMENTS     322,158       325,892  
GOODWILL AND OTHER INTANGIBLE ASSETS-Net     9,964       2,117  
OTHER ASSETS     61,144       52,576  
TOTAL ASSETS   $ 1,032,729     $ 975,497  
LIABILITIES AND STOCKHOLDERS' EQUITY                
CURRENT LIABILITIES:                
  Accounts payable   $ 26,369     $ 20,816  
  Accrued liabilities     21,677       22,263  
  Accrued payroll and compensation     26,350       28,957  
  Deferred revenue     257,332       247,268  
    Total current liabilities     331,728       319,304  
DEFERRED REVENUE-Non-current     119,082       115,917  
OTHER LIABILITIES     34,210       29,342  
    Total liabilities     485,020       464,563  
STOCKHOLDERS' EQUITY:                
  Common stock     164       162  
  Additional paid-in capital     425,524       400,075  
  Treasury stock     (2,995 )     (2,995 )
  Accumulated other comprehensive income     2,166       3,091  
  Retained earnings     122,850       110,601  
    Total stockholders' equity     547,709       510,934  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 1,032,729     $ 975,497  
                 
                 
                 
FORTINET, INC.  
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  
(Unaudited, in thousands, except per share amounts)  
           
    Three Months Ended  
    March 31,   March 31,  
    2013   2012  
REVENUE:              
  Product   $ 57,950   $ 53,204  
  Services     75,896     62,138  
  Ratable and other revenue     1,974     1,905  
    Total revenue     135,820     117,247  
COST OF REVENUE:              
  Product 1     22,958     19,067  
  Services 1     15,574     11,213  
  Ratable and other revenue     596     763  
    Total cost of revenue     39,128     31,043  
GROSS PROFIT:              
  Product     34,992     34,137  
  Services     60,322     50,925  
  Ratable and other revenue     1,378     1,142  
    Total gross profit     96,692     86,204  
OPERATING EXPENSES:              
  Research and development 1     23,334     19,667  
  Sales and marketing 1     49,976     42,036  
  General and administrative 1     7,991     5,786  
    Total operating expenses     81,301     67,489  
OPERATING INCOME     15,391     18,715  
INTEREST INCOME     1,369     1,085  
OTHER INCOME (EXPENSE)-Net     215     (71 )
INCOME BEFORE INCOME TAXES     16,975     19,729  
PROVISION FOR INCOME TAXES     4,726     5,556  
NET INCOME   $ 12,249   $ 14,173  
Net income per share:              
  Basic   $ 0.08   $ 0.09  
  Diluted   $ 0.07   $ 0.09  
Weighted-average shares outstanding:              
  Basic     161,282     156,010  
  Diluted     167,823     165,751  
               
1 Includes stock-based compensation expense as follows:              
  Cost of product revenue   $ 90   $ 64  
  Cost of services revenue     1,020     745  
  Research and development     2,766     1,957  
  Sales and marketing     4,118     3,443  
  General and administrative     1,305     1,037  
    $ 9,299   $ 7,246  
               
               
               
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME  
(Unaudited, in thousands)  
             
    Three Months Ended  
    March 31,     March 31,  
    2013     2012  
Net income   $ 12,249     $ 14,173  
Other comprehensive (loss) income, net of reclassification adjustments:                
  Foreign currency translation (losses) gains     (952 )     558  
  Unrealized gains on investments     42       1,799  
  Tax provision related to items of other comprehensive income or loss     (15 )     (629 )
Other comprehensive (loss) income, net of tax     (925 )     1,728  
Comprehensive income   $ 11,324     $ 15,901  
                 
                 
                 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  
(Unaudited, in thousands)  
             
    Three Months Ended  
    March 31,     March 31,  
    2013     2012  
CASH FLOWS FROM OPERATING ACTIVITIES:                
  Net income   $ 12,249     $ 14,173  
  Adjustments to reconcile net income to net cash provided by operating activities:                
    Depreciation and amortization     3,098       2,082  
    Amortization of investment premiums     3,051       3,255  
    Stock-based compensation     9,299       7,246  
    Excess tax benefit from employee stock option plans     (1,453 )     (2,320 )
    Other non-cash items, net     (540 )     19  
    Changes in operating assets and liabilities:                
      Accounts receivable-Net     5,747       10,763  
      Inventory     (4,520 )     (3,409 )
      Prepaid expenses and other current assets     (202 )     (345 )
      Other assets     (8,568 )     569  
      Accounts payable     4,957       (6,319 )
      Accrued liabilities     (11 )     (231 )
      Accrued payroll and compensation     (2,416 )     (547 )
      Deferred revenue     12,677       19,696  
      Income taxes payable     4,305       3,886  
    Net cash provided by operating activities     37,673       48,518  
CASH FLOWS FROM INVESTING ACTIVITIES:                
  Purchases of investments     (171,506 )     (192,567 )
  Sales of investments     13,823       17,416  
  Maturities of investments     86,018       115,026  
  Purchases of property and equipment     (1,534 )     (1,624 )
  Payments made in connection with business acquisitions     (5,979 )     (550 )
    Net cash used in investing activities     (79,178 )     (62,299 )
CASH FLOWS FROM FINANCING ACTIVITIES:                
  Proceeds from issuance of common stock     14,464       13,551  
  Excess tax benefit from employee stock option plans     1,453       2,320  
    Net cash provided by financing activities     15,917       15,871  
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS     (3 )     703  
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS     (25,591 )     2,793  
CASH AND CASH EQUIVALENTS-Beginning of period     122,975       71,990  
CASH AND CASH EQUIVALENTS-End of period   $ 97,384     $ 74,783  
                 
                 
                 
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  
    March 31     March 31,  
    2013     2012  
Total revenue   $ 135,820     $ 117,247  
  Add increase in deferred revenue     13,229       19,739  
  Less deferred revenue balance acquired in business combination     (550 )     -  
Total billings (Non-GAAP)   $ 148,499     $ 136,986  
                 
                 
Reconciliation of net cash provided by operating activities to free cash flow  
             
    Three Months Ended  
    March 31,     March 31,  
    2013     2012  
Net cash provided by operating activities   $ 37,673     $ 48,518  
  Less purchases of property and equipment     (1,534 )     (1,624 )
Free cash flow (Non-GAAP)   $ 36,139     $ 46,894  
                 
                 
                 
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 March 31, 2013     Three Months Ended March 31, 2012  
    GAAP Results     Adjustments       Non-GAAP Results     GAAP Results     Adjustments       Non-GAAP Results  
Operating Income   $ 15,391     $ 8,821   (a)   $ 24,212     $ 18,715     $ 6,768   (b)   $ 25,483  
Operating Margin     11 %               18 %     16 %               22 %
  Adjustments:                                                    
  Stock-based compensation expense             9,299                         7,246            
  Patent settlement income             (478)                         (478)            
  Tax adjustment             (3,787)   (c)                     (3,453)   (d)        
Net Income   $ 12,249     $ 5,034       $ 17,283     $ 14,173     $ 3,315       $ 17,488  
Diluted net income per share   $ 0.07               $ 0.10     $ 0.09               $ 0.11  
Shares used in per share calculations - diluted     167,823                 167,823       165,751                 165,751  
                                                     
   
(a) To exclude $9.3 million of stock-based compensation expense offset by $0.5 million of patent settlement income in the three months ended March 31, 2013.
   
(b) To exclude $7.2 million of stock-based compensation expense offset by $0.5 million of patent settlement income in the three months ended March 31, 2012.
   
(c) 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 March 31, 2013.
   
(d) 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 March 31, 2012.

 

Contact:
Investor

Michelle Spolver
Fortinet, Inc.
408-486-7837
mspolver@fortinet.com

Media
Rick Popko
Fortinet, Inc.
408-486-7853
rpopko@fortinet.com
View Comments (0)