Fortinet Earnings 2020-03-31

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-34511

______________________________________

FORTINET, INC.

(Exact name of registrant as specified in its charter)

______________________________________



Delaware			77-0560389
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

899 Kifer Road

Sunnyvale, California 94086

(Address of principal executive offices, including zip code)

(408) 235-7700

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:



Common Stock, $0.001 Par Value	FTNT	The Nasdaq Stock Market LLC
(Title of each class)	(Trading Symbol)	(Name of exchange on which registered)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Non-accelerated filer	☐	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of May 1, 2020, there were 161,648,540 shares of the registrant’s common stock outstanding.

FORTINET, INC.

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended March 31, 2020

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		Page

	PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019	1
	Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2020 and 2019	2
	Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2020 and 2019	3
	Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019	4
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	33
Item 4.	Controls and Procedures	33

	PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64
Item 6.	Exhibits	65
	Exhibit Index	65
	Signatures	66

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PART I—FINANCIAL INFORMATION

ITEM 1.
Financial Statements

FORTINET, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, in millions, except per share amounts)



	March 31, 2020			December 31, 2019
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	626.1		$	1,222.5
Short-term investments	775.2			843.1
Accounts receivable—net	474.7			544.3
Inventory	105.0			117.9
Prepaid expenses and other current assets	54.3			41.2
Total current assets	2,035.3			2,769.0
LONG-TERM INVESTMENTS	172.0			144.3
PROPERTY AND EQUIPMENT—NET	374.2			344.3
DEFERRED CONTRACT COSTS	248.7			237.0
DEFERRED TAX ASSETS	226.5			232.6
GOODWILL	67.2			67.2
OTHER INTANGIBLE ASSETS—NET	27.1			31.1
OTHER ASSETS	55.2			60.0
TOTAL ASSETS	$	3,206.2		$	3,885.5
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	87.8		$	96.4
Accrued liabilities	121.4			101.8
Accrued payroll and compensation	103.6			101.8
Deferred revenue	1,230.2			1,173.6
Total current liabilities	1,543.0			1,473.6
DEFERRED REVENUE	996.6			962.3
INCOME TAX LIABILITIES	81.3			82.8
OTHER LIABILITIES	49.0			44.9
Total liabilities	2,669.9			2,563.6
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS’ EQUITY:
Common stock, $0.001 par value—300 shares authorized; 162.6 and 171.7 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively	0.2			0.2
Additional paid-in capital	1,128.4			1,180.3
Accumulated other comprehensive income (loss)	(3.1		)	1.1
Retained earnings (accumulated deficit)	(589.2		)	140.3
Total stockholders’ equity	536.3			1,321.9
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	3,206.2		$	3,885.5

See notes to condensed consolidated financial statements.

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FORTINET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited, in millions, except per share amounts)



	Three Months Ended
	March 31, 2020			March 31, 2019
REVENUE:
Product	$	192.3		$	162.7
Service	384.6			309.9
Total revenue	576.9			472.6
COST OF REVENUE:
Product	76.3			70.2
Service	52.4			42.8
Total cost of revenue	128.7			113.0
GROSS PROFIT:
Product	116.0			92.5
Service	332.2			267.1
Total gross profit	448.2			359.6
OPERATING EXPENSES:
Research and development	80.3			68.6
Sales and marketing	260.0			215.9
General and administrative	28.8			24.5
Gain on intellectual property matter	(36.8		)	—
Total operating expenses	332.3			309.0
OPERATING INCOME	115.9			50.6
INTEREST INCOME—NET	9.2			10.2
OTHER EXPENSE—NET	(8.0		)	(0.5		)
INCOME BEFORE INCOME TAXES	117.1			60.3
PROVISION FOR INCOME TAXES	13.1			1.5
NET INCOME	$	104.0		$	58.8
Net income per share (Note 8):
Basic	$	0.61		$	0.35
Diluted	$	0.60		$	0.34
Weighted-average shares outstanding:
Basic	170.6			170.2
Diluted	174.2			174.8

See notes to condensed consolidated financial statements.

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FORTINET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in millions)



	Three Months Ended
	March 31, 2020			March 31, 2019
Net income	$	104.0		$	58.8
Other comprehensive income (loss):
Change in unrealized gains (losses) on investments	(5.2		)	1.0
Less: tax provision (benefit) related to change in unrealized gains (losses) on investments	(1.0		)	0.3
Other comprehensive income (loss)	(4.2		)	0.7
Comprehensive income	$	99.8		$	59.5

See notes to condensed consolidated financial statements.

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FORTINET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited, in millions)



	Three Months Ended March 31, 2020
	Common Stock				Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Total Stockholders’ Equity
	Shares		Amount		Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Total Stockholders’ Equity
BALANCE—December 31, 2019	171.7		$	0.2	$	1,180.3		$	1.1		$	140.3		$	1,321.9
Issuance of common stock in connection with equity incentive plans - net of tax withholding	0.9		—		(30.3		)	—			—			(30.3		)
Repurchase and retirement of common stock	(10.0	)	—		(66.4		)	—			(833.5		)	(899.9		)
Stock-based compensation expense	—		—		44.8			—			—			44.8
Net unrealized gain (loss) on investments - net of tax	—		—		—			(4.2		)	—			(4.2		)
Net income	—		—		—			—			104.0			104.0
BALANCE—March 31, 2020	162.6		$	0.2	$	1,128.4		$	(3.1	)	$	(589.2	)	$	536.3

	Three Months Ended March 31, 2019
	Common Stock				Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders’ Equity
	Shares		Amount		Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders’ Equity
BALANCE—December 31, 2018	169.8		$	0.2	$	1,068.3		$	(0.8	)	$	(57.5	)	$	1,010.2
Issuance of common stock in connection with equity incentive plans - net of tax withholding	1.7		—		1.6			—			—			1.6
Repurchase and retirement of common stock	(0.8	)	—		(4.8		)	—			(51.4		)	(56.2		)
Stock-based compensation expense	—		—		43.0			—			—			43.0
Cumulative-effect adjustment from adoption of ASU 2018-02	—		—		—			(0.1		)	0.1			—
Net unrealized gain (loss) on investments - net of tax	—		—		—			0.7			—			0.7
Net income	—		—		—			—			58.8			58.8
BALANCE—March 31, 2019	170.7		$	0.2	$	1,108.1		$	(0.2	)	$	(50.0	)	$	1,058.1

See notes to condensed consolidated financial statements.

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FORTINET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in millions)



	Three Months Ended
	March 31, 2020			March 31, 2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	104.0		$	58.8
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation	44.8			43.0
Amortization of deferred contract costs	31.3			25.1
Depreciation and amortization	17.6			15.7
Amortization of investment premiums (discounts)	(0.6		)	(1.1		)
Other	4.3			0.3
Changes in operating assets and liabilities:
Accounts receivable—net	69.6			63.6
Inventory	6.7			(2.6		)
Prepaid expenses and other current assets	(12.9		)	(5.9		)
Deferred contract costs	(43.0		)	(32.9		)
Deferred tax assets	7.1			(8.0		)
Other assets	0.9			0.1
Accounts payable	(9.0		)	(18.0		)
Accrued liabilities	1.8			3.2
Accrued payroll and compensation	1.8			(18.1		)
Other liabilities	4.1			(0.9		)
Deferred revenue	90.9			79.0
Net cash provided by operating activities	319.4			201.3
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments	(368.3		)	(264.5		)
Sales of investments	126.8			8.1
Maturities of investments	277.2			227.6
Purchases of property and equipment	(27.6		)	(10.2		)
Payments made in connection with business combination, net of cash acquired	(3.1		)	—
Other	(0.4		)	—
Net cash provided by (used in) investing activities	4.6			(39.0		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase and retirement of common stock	(889.9		)	(60.4		)
Proceeds from issuance of common stock	7.4			34.6
Taxes paid related to net share settlement of equity awards	(37.8		)	(32.0		)
Other	(0.1		)	—
Net cash used in financing activities	(920.4		)	(57.8		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(596.4		)	104.5
CASH AND CASH EQUIVALENTS—Beginning of period	1,222.5			1,112.4
CASH AND CASH EQUIVALENTS—End of period	$	626.1		$	1,216.9
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Operating lease liabilities arising from obtaining right-of-use assets	$	2.4		$	3.5
Cash paid to settle liability incurred for repurchase of common stock	$	—		$	4.2
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfers of evaluation units from inventory to property and equipment	$	6.3		$	4.3
Liability for purchase of property and equipment and asset retirement obligations	$	25.9		$	7.6
Liability incurred for repurchase of common stock	$	10.0		$	—

See notes to condensed consolidated financial statements.

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FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)


1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Preparation—The unaudited condensed consolidated financial statements of Fortinet, Inc. and its wholly owned subsidiaries (collectively, “we,” “us” or “our”) have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information, as well as the instructions to Form 10-Q pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements, and should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2019, contained in our Annual Report on Form 10-K filed with the SEC on February 26, 2020. In the opinion of management, all adjustments, which includes normal recurring adjustments, considered necessary for a fair presentation have been included. All intercompany balances, transactions and cash flows have been eliminated. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results for the full year or for any future periods. The condensed consolidated balance sheet as of December 31, 2019 is derived from the audited consolidated financial statements for the year ended December 31, 2019. For 2020, the amounts previously reported as Income taxes payable are included in Accrued liabilities. Prior periods have been reclassified to conform with current period presentation.

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

There have been no material changes to our significant accounting policies as of and for the three months ended March 31, 2020.

Recently Adopted Accounting Standards

Financial Instruments

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13—Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“Topic 326”), which provides guidance on how an entity should measure credit losses on financial instruments. The standard replaces the existing incurred loss model with an expected credit loss model for financial assets measured at amortized cost, including trade receivables, and requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down. The new approach to estimating credit losses (referred to as the current expected credit losses model) generally accelerates recognition of credit losses. We adopted Topic 326 on January 1, 2020 using the modified retrospective method. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

Cloud Computing

In August 2018, the FASB issued ASU 2018-15—Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification (“ASC”) Topic 350, Intangibles—Goodwill and Other, to determine which implementation costs to capitalize as assets or expense as incurred. We adopted ASU 2018-15 on January 1, 2020. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

Fair Value Measurements

In August 2018, the FASB issued ASU 2018-13—Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements in ASC 820, Fair Value Measurement, as part of its disclosure framework project. We adopted ASU 2018-13 on January 1, 2020. The adoption of this standard did not have a material impact on our disclosures.

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FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Recent Accounting Standards Not Yet Effective

Income Taxes

In December 2019, the FASB issued ASU 2019-12—Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application and simplification of GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for us beginning on January 1, 2021. Early adoption of the amendments is permitted. We are currently evaluating the impact of ASU 2019-12 on our condensed consolidated financial statements.

2. REVENUE RECOGNITION

Our revenue consists of product and service revenue. Product revenue is generated by sales of our FortiGate products and other hardware and software solutions. Service revenue relates to sales of our FortiGuard security subscription, FortiCare technical support services and other services.

Disaggregation of Revenue

The following table presents our revenue disaggregated by major product and service lines (in millions):



	Three Months Ended
	March 31, 2020		March 31, 2019
Product	$	192.3	$	162.7
Service:
Security subscription	211.4		169.6
Technical support and other	173.2		140.3
Total service revenue	384.6		309.9
Total revenue	$	576.9	$	472.6

Deferred Revenue

During the three months ended March 31, 2020 and March 31, 2019, we recognized $348.9 million and $288.6 million in service revenue that was included in the deferred revenue balance as of December 31, 2019 and December 31, 2018, respectively.

Transaction Price Allocated to the Remaining Performance Obligations

As of March 31, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $2.23 billion, which was substantially comprised of deferred security subscription and technical support services revenue. We expect to recognize approximately $1.23 billion as revenue over the next 12 months and the remainder thereafter.

Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount. On January 1, 2020, we adopted Topic 326, which provides guidance on how to measure credit losses on financial instruments, including accounts receivable. Prior to our adoption of Topic 326, our accounts receivable balance was reduced by an allowance for doubtful accounts that we determined based on our assessment of the collectability of customer accounts. Under Topic 326, our accounts receivable balance is reduced by an allowance for credit losses. We measure expected credit losses of accounts receivable on a collective (pool) basis, aggregating accounts receivable that are either current or no more than 60 days past due, and aggregating accounts receivable that are more than 60 days past due. We apply a credit-loss percentage to each of the pools that is based on our historical credit losses. We review whether each of our significant accounts receivable that is more than 60 days past due continues to exhibit

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FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

similar risk characteristics with the other accounts receivable in the pool. If we determine that it does not, we evaluate it for expected credit losses on an individual basis.

The COVID-19 pandemic and the recent economic downturn prompted us to perform additional credit reviews of our existing customers, including obtaining recent credit reports and reviewing their latest available statements of financial position. After performing our additional reviews, we determined that, while there may be delays in our collections, the risk of credit loss on our trade accounts receivable as of March 31, 2020 was expected to be consistent with prior periods and that our methodology for estimating credit losses was appropriate.

The allowance for credit losses was $1.1 million as of March 31, 2020, and the allowance for doubtful accounts was $1.2 million as of December 31, 2019. Provisions, write-offs and recoveries were not material during the three months ended March 31, 2020.

Deferred Contract Costs

Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. The amortization of deferred contract costs is included in sales and marketing expense in our condensed consolidated statements of income. Amortization of deferred contract costs during the three months ended March 31, 2020 and March 31, 2019 were $31.3 million and $25.1 million, respectively.


3.	FINANCIAL INSTRUMENTS AND FAIR VALUE

The following tables summarize our investments (in millions):



	March 31, 2020
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Corporate debt securities	$	616.3	$	0.3	$	(4.2	)	$	612.4
Commercial paper	150.6		0.1		(0.1		)	150.6
U.S. government securities	96.6		0.5		—			97.1
Certificates of deposit and term deposits ⁽¹⁾	87.7		0.1		(0.7		)	87.1
Total available-for-sale securities	$	951.2	$	1.0	$	(5.0	)	$	947.2



	December 31, 2019
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Corporate debt securities	$	576.1	$	1.0	$	(0.1	)	$	577.0
Commercial paper	148.7		0.1		—			148.8
U.S. government securities	195.0		0.2		—			195.2
Certificates of deposit and term deposits ⁽¹⁾	66.4		—		—			66.4
Total available-for-sale securities	$	986.2	$	1.3	$	(0.1	)	$	987.4

⁽¹⁾The majority of our certificates of deposit and term deposits are foreign deposits.

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FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following tables show the gross unrealized losses and the related fair values of our investments that have been in a continuous unrealized loss position (in millions):



	March 31, 2020
	Less Than 12 Months					12 Months or Greater				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Corporate debt securities	$	475.2	$	(4.2	)	$	7.1	$	—	$	482.3	$	(4.2	)
Commercial paper	45.5		(0.1		)	—		—		45.5		(0.1		)
Certificates of deposit and term deposits	49.1		(0.7		)	—		—		49.1		(0.7		)
Total available-for-sale securities	$	569.8	$	(5.0	)	$	7.1	$	—	$	576.9	$	(5.0	)



	December 31, 2019
	Less Than 12 Months					12 Months or Greater				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Corporate debt securities	$	117.3	$	(0.1	)	$	16.1	$	—	$	133.4	$	(0.1	)
Commercial paper	26.0		—			—		—		26.0		—
U.S. government securities	47.1		—			—		—		47.1		—
Certificates of deposit and term deposits	13.0		—			—		—		13.0		—
Total available-for-sale securities	$	203.4	$	(0.1	)	$	16.1	$	—	$	219.5	$	(0.1	)

The contractual maturities of our investments were as follows (in millions):



	March 31, 2020		December 31, 2019
Due within one year	$	775.2	$	843.1
Due within one to three years	172.0		144.3
Total	$	947.2	$	987.4

Available-for-sale securities are reported at fair value, with unrealized gains and losses and the related tax impact included as a separate component of stockholders’ equity and in comprehensive income. Accrued interest of $4.7 million as of March 31, 2020 is excluded from both the fair value and the amortized cost of our available-for-sale securities and is recorded in Prepaid expenses and other current assets in our condensed consolidated balance sheet. We have elected to not record an allowance for credit losses for accrued interest for available-for-sale securities and will reverse the accrued interest against interest income in the period in which we determine the accrued interest to be uncollectible.

Prior to 2020, we followed the guidance in ASC 320 Investments—Debt and Equity Securities in determining whether unrealized losses were other than temporary. We adopted Topic 326 on January 1, 2020, and now consider whether unrealized losses have resulted from a credit loss or other factors. The unrealized losses on our available-for-sale securities as of March 31, 2020 and as of December 31, 2019 were caused by fluctuations in market value and interest rates as a result of the economic environment. We concluded that an allowance for credit losses was unnecessary as of March 31, 2020 and that the impairments as of December 31, 2019 were not other than temporary because (i) the decline in market value was attributable to changes in market conditions and not credit quality, and (ii) we concluded that neither do we intend to sell nor is it more likely than not that we will be required to sell these investments prior to recovery of their amortized cost basis.

Realized losses on available-for-sale securities were insignificant in the periods presented and are included in Other expense—net in our consolidated statements of income. We use the specific identification method to determine the cost basis of investments sold.

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FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Fair Value Accounting—We apply the following fair value hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments.

Level 3—Unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. The inputs require significant management judgment or estimation.

We measure the fair value of money market funds and certain U.S. government securities using quoted prices in active markets for identical assets. The fair value of all other financial instruments was based on quoted prices for similar assets in active markets, or model-driven valuations using significant inputs derived from or corroborated by observable market data.

We classify investments within Level 1 if quoted prices are available in active markets for identical securities.

We classify items within Level 2 if the investments are valued using model-driven valuations using observable inputs such as quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. Investments are held by custodians who obtain investment prices from a third-party pricing provider that incorporates standard inputs in various asset price models.

Fair Value of Financial Instruments

Assets Measured at Fair Value on a Recurring Basis

The following tables present the fair value of our financial assets measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019 (in millions):



	March 31, 2020								December 31, 2019
	Aggregate Fair Value		Quoted Prices in Active Markets For Identical Assets		Significant Other Observable Remaining Inputs		Significant Other Unobservable Remaining Inputs		Aggregate Fair Value		Quoted Prices in Active Markets For Identical Assets		Significant Other Observable Remaining Inputs		Significant Other Unobservable Remaining Inputs
			(Level 1)		(Level 2)		(Level 3)				(Level 1)		(Level 2)		(Level 3)
Assets:
Corporate debt securities	$	613.4	$	—	$	613.4	$	—	$	577.0	$	—	$	577.0	$	—
Commercial paper	164.6		—		164.6		—		165.8		—		165.8		—
Certificates of deposit and term deposits	87.1		—		87.1		—		66.4		—		66.4		—
U.S. government securities	97.1		97.1		—		—		195.2		195.2		—		—
Money market funds	163.7		163.7		—		—		15.0		15.0		—		—
Total	$	1,125.9	$	260.8	$	865.1	$	—	$	1,019.4	$	210.2	$	809.2	$	—

Reported as:
Cash equivalents	$	178.7							$	32.0
Short-term investments	775.2								843.1
Long-term investments	172.0								144.3
Total	$	1,125.9							$	1,019.4

Table of Contents

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2020 and year ended December 31, 2019.

4. INVENTORY

Inventory consisted of the following (in millions):



	March 31, 2020		December 31, 2019
Raw materials	$	12.5	$	9.7
Finished goods	92.5		108.2
Inventory	$	105.0	$	117.9

5. PROPERTY AND EQUIPMENT—Net

Property and equipment—net consisted of the following (in millions):



	March 31, 2020			December 31, 2019
Land	$	93.3		$	93.3
Building and building improvements	148.0			147.4
Computer equipment and software	121.7			116.7
Leasehold improvements	26.8			25.5
Evaluation units	22.4			19.9
Furniture and fixtures	18.2			17.3
Construction-in-progress	90.7			61.2
Total property and equipment	521.1			481.3
Less: accumulated depreciation	(146.9		)	(137.0		)
Property and equipment—net	$	374.2		$	344.3

Depreciation expense was $13.6 million and $12.7 million during the three months ended March 31, 2020 and March 31, 2019, respectively.

6. INVESTMENTS IN PRIVATELY HELD COMPANIES

Our investments in the equity securities of privately held companies totaled $1.0 million and $5.3 million as of March 31, 2020 and December 31, 2019, respectively. These investments are accounted for at cost, adjusted for changes in observable prices minus impairment. We own less than 20% of the voting securities in each of these investments and do not have the ability to exercise significant influence over operating and financial policies of the respective entities. These investments are recorded as Other assets in our condensed consolidated balance sheets and would be measured at fair value if indicators of an increase in value or impairment existed. During the three months ended March 31, 2020, we determined that one investment was impaired. As a result, we recognized and included a non-cash impairment charge of $4.3 million in Other expense—net in our condensed consolidated statements of income. As of March 31, 2020, no other events have occurred that would affect the carrying value of these investments.

7. GOODWILL AND OTHER INTANGIBLE ASSETS—Net

Goodwill

As of March 31, 2020 and December 31, 2019, we had goodwill of $67.2 million. There were no impairments to goodwill during the three months ended March 31, 2020 or during prior periods.

Table of Contents

FORTINET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Other Intangible Assets—Net

The following tables present other intangible assets—net as of March 31, 2020 and December 31, 2019 (in millions, except years):



	March 31, 2020
	Weighted-Average Useful Life (in Years)	Gross		Accumulated Amortization		Net
Other intangible assets—net:
Finite-lived intangible assets:
Developed technologies	4.0	$	48.8	$	25.8	$	23.0
Customer relationships	4.1	21.6		17.5		4.1
Total other intangible assets—net		$	70.4	$	43.3	$	27.1



	December 31, 2019
	Weighted-Average Useful Life (in Years)	Gross		Accumulated Amortization		Net
Other intangible assets—net:
Finite-lived intangible assets:
Developed technologies	4.0	$	50.2	$	24.6	$	25.6
Customer relationships	4.1	21.6		16.1		5.5
Total other intangible assets—net		$	71.8	$	40.7	$	31.1

Price	78.86	EPS	1
Shares	175	P/E	65
MCap	13,793	P/FCF	22
Net Debt	-1,176	EBIT	252
TEV	12,617	TEV/EBIT	50
TTM 2019-09-30, in MM, except price, ratios

10-Q	2020-03-31	Filed 2020-05-07
10-K	2019-12-31	Filed 2020-02-26
10-Q	2019-09-30	Filed 2019-10-31
10-Q	2019-06-30	Filed 2019-08-01
10-Q	2019-03-31	Filed 2019-05-08
10-K	2018-12-31	Filed 2019-02-27
10-Q	2018-09-30	Filed 2018-11-07
10-Q	2018-06-30	Filed 2018-08-07
10-Q	2018-03-31	Filed 2018-05-08
10-K	2017-12-31	Filed 2018-02-26
10-Q	2017-09-30	Filed 2017-11-02
10-Q	2017-06-30	Filed 2017-08-02
10-Q	2017-03-31	Filed 2017-05-03
10-K	2016-12-31	Filed 2017-03-01
10-Q	2016-09-30	Filed 2016-11-08
10-Q	2016-06-30	Filed 2016-08-05
10-Q	2016-03-31	Filed 2016-05-06
10-K	2015-12-31	Filed 2016-02-26
10-Q	2015-09-30	Filed 2015-11-09
10-Q	2015-06-30	Filed 2015-08-04
10-Q	2015-03-31	Filed 2015-05-01
10-K	2014-12-31	Filed 2015-03-02
10-Q	2014-09-30	Filed 2014-11-06
10-Q	2014-06-30	Filed 2014-08-05
10-Q	2014-03-31	Filed 2014-05-07
10-K	2013-12-31	Filed 2014-03-03
10-Q	2013-09-30	Filed 2013-11-05
10-Q	2013-06-30	Filed 2013-08-06
10-Q	2013-03-31	Filed 2013-05-08
10-K	2012-12-31	Filed 2013-02-27
10-Q	2012-09-30	Filed 2012-10-30
10-Q	2012-06-30	Filed 2012-08-08
10-Q	2012-03-31	Filed 2012-05-07
10-K	2011-12-31	Filed 2012-02-28
10-Q	2011-09-30	Filed 2011-11-04
10-Q	2011-06-30	Filed 2011-08-04
10-Q	2011-03-31	Filed 2011-05-05
10-K	2010-12-31	Filed 2011-02-25
10-Q	2010-09-30	Filed 2010-11-05
10-Q	2010-06-30	Filed 2010-08-06
10-Q	2010-03-31	Filed 2010-05-13
10-K	2009-12-31	Filed 2010-03-05

8-K	2020-07-17	Amend Bylaw, Other Events, Exhibits
8-K	2020-06-19
8-K	2020-05-06
8-K	2020-04-17
8-K	2020-02-26
8-K	2020-02-06
8-K	2019-12-12
8-K	2019-10-31
8-K	2019-10-28
8-K	2019-10-18
8-K	2019-08-01
8-K	2019-06-21
8-K	2019-05-02
8-K	2019-02-06
8-K	2018-11-01
8-K	2018-10-23
8-K	2018-08-01
8-K	2018-06-22
8-K	2018-06-04
8-K	2018-05-03
8-K	2018-02-02

EX-31.1	ftnt-ex31120200331x10q.htm
EX-31.2	ftnt-ex31220200331x10q.htm
EX-32.1	ftnt-ex32120200331x10q.htm

FTNT 10Q Quarterly Report

Fortinet Earnings 2020-03-31