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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 September 30, 2024
or
☐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)
______________________________________

Delaware77-0560389
(State or other jurisdiction of
incorporation or organization)		(I.R.S. Employer
Identification No.)

909 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:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.001 Par ValueFTNTThe Nasdaq Stock Market LLC

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. 

Large accelerated filer☒Accelerated filer☐
Non-accelerated filer☐Smaller reporting company☐
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 November 7, 2024, there were 766,452,698 shares of the registrant’s common stock outstanding.



FORTINET, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2024
Table of Contents
 
  Page
PART I—FINANCIAL INFORMATION
Item 1.
Item 2.
Item 3.
Item 4.
PART II—OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 5.
Item 6.





Summary of Risk Factors

Our business is subject to numerous risks and uncertainties, including those described in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q. You should carefully consider these risks and uncertainties when investing in our common stock. Some of the principal risks and uncertainties include:

•Our operating results are likely to vary significantly and be unpredictable.

•Adverse economic conditions, such as a possible economic downturn or recession, and possible impacts of inflation or stagflation, increasing or decreasing interest rates, changes in government spending or regulation or reduced information technology spending, including firewall spending, may adversely impact our business.

•We have been, and may in the future be, susceptible to supply chain constraints, supply shortages and disruptions, long or less predictable lead times for components and finished goods and supply changes because some of the key components in our products come from limited sources of supply.

•As a result of supply chain disruptions in previous periods, we increased our purchase order commitments in previous periods and, were in some instances required to and may in the future be required to accept or pay for components and finished goods regardless of our level of sales in a particular period, which may negatively impact our operating results and financial condition.

•Our billings, revenue, and free cash flow growth may slow or may not continue to grow, and our operating margins may decline.

•Our real estate assets, including construction, acquisitions, leasing activity, and ongoing maintenance and management of office buildings, warehouses, data centers and points of presence, as well as data center expansions or enhancements, could involve significant risks to our business.

•Our backlog may fluctuate over quarters. A reduction to backlog increases our aggregate billings and revenue during the quarter when delivered. If we experience supply chain shortages and cannot fulfill orders or if customers cancel or delay delivery of orders, our backlog may be affected, which will negatively impact our aggregate backlog to billings conversion and revenue in such quarter.

•As the supply chain challenges normalize, our product revenue growth rate may be lower versus prior quarters where delivery from backlog contributed more to billings. We expect billings growth to normalize and lower the impact from backlog fluctuations. For the first three quarters of 2024, the comparably lower backlog contribution to billings has resulted in decreased year-over-year quarterly growth rates.

•Any weakness in sales strategy, productivity, personnel and execution could negatively impact our results of operations.

•We are dependent on the continued services and performance of our senior management, as well as our ability to hire, retain and motivate qualified personnel.

•We rely on third-party channel partners for substantially all of our billings, revenue, and a small number of distributors represents a large percentage of our revenue and accounts receivable.

•Reliance on a concentration of shipments at the end of the quarter or changes in shipping terms could cause our billings and revenue to fall below expected levels.

•We rely significantly on revenue from FortiGuard security subscription and FortiCare technical support services, and revenue from these services may decline or fluctuate.

•We face intense competition in our market and we may not maintain or improve our competitive position.

•We are susceptible to defects or vulnerabilities in our products or services, as well as reputational harm from the failure or misuse of our products or services, and any actual or perceived defects or vulnerabilities in our products or services, failure of our products or services to detect or prevent a security incident or to cause a disruption to operations, failure of our customers to implement preventative actions such as updates to one of our deployed solutions or failure to help secure our customers, could cause our products or services to allow unauthorized access to our customers’ networks and harm our operational results and reputation more significantly as compared to other
1

companies. Our Product Security Incident Response Team publicly posts on our FortiGuard Labs website known product vulnerabilities, including critical vulnerabilities, and methods for customers to mitigate the risk of vulnerabilities. However, there can be no assurance that such posts will be sufficiently timely, accurate or complete or that those customers will take steps to mitigate the risk of vulnerabilities, and certain customers may be negatively impacted.

•If our internal enterprise IT networks, our operational networks, our research and development networks, our back-end labs and cloud stacks hosted in our data centers, colocation vendors or public cloud providers are compromised, public perception of our products and services may be harmed, our customers may be breached and harmed, we may become subject to liability, and our business, operating results and stock price may be adversely impacted.

•We have incurred indebtedness and may incur other debt in the future, which may adversely affect our financial condition and future financial results.

•We generate a majority of billings, revenue and cash flow from sales outside of the United States.

•We may not be successful in executing our strategy to increase our sales to large- and medium-sized end-customers.

•A portion of our revenue is generated by sales to government organizations and other customers, which are subject to a number of regulatory requirements, their own supply chain and contractual requirements, challenges and risks.

•We order components from third-party manufacturers based on our forecasts of future demand and targeted inventory levels, which exposes us to the risk of both product shortages, may result in lost sales and higher expenses, and inventory excesses which may result in inventory charges and costs related to future purchase commitments, and may require us to sell our products at discounts or offer various other incentives.

•We depend on third parties to provide various components for our products and build our products and are susceptible to manufacturing delays, capacity constraints, cost increases, and changes in the geopolitical environment.

•Our inability to successfully acquire and integrate other businesses, products or technologies, or to successfully invest in and form successful strategic alliances with other businesses, could seriously harm our competitive position and could negatively affect our financial condition and results of operations.

•Investors’ and regulators’ expectations of our performance relating to environmental, social and governance factors may impose additional costs and expose us to new risks.

•We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial condition and results of operations.

•Our proprietary rights may be difficult to enforce and we may be subject to claims by others that we infringe their proprietary technology.

•The trading price of our common stock may be volatile, which volatility may be exacerbated by share repurchases under our Share Repurchase Program (the “Repurchase Program”).

•Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.

•Global economic uncertainty can weaken and harm our financial position.

•Weakening product demand caused by political instability, changes in trade agreements, wars and foreign conflicts, such as the war in Ukraine and the Israel-Hamas war or tensions between China and Taiwan, could adversely affect our business and financial performance.
2
PART I—FINANCIAL INFORMATION

ITEM 1.     Financial Statements
FORTINET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in millions, except per share amounts)
 September 30,
2024		December 31,
2023
ASSETS
CURRENT ASSETS:
Cash and cash equivalents$2,489.3 $1,397.9 
Short-term investments1,162.4 1,021.5 
Marketable equity securities49.0 21.0 
Accounts receivable—net 1,044.1 1,402.0 
Inventory354.3 484.8 
Prepaid expenses and other current assets121.5 101.1 
Total current assets5,220.6 4,428.3 
PROPERTY AND EQUIPMENT—NET1,273.4 1,044.4 
DEFERRED CONTRACT COSTS599.4 605.6 
DEFERRED TAX ASSETS1,300.4 868.8 
GOODWILL212.8 126.5 
OTHER INTANGIBLE ASSETS—NET111.6 35.3 
OTHER ASSETS133.8 150.0 
TOTAL ASSETS$8,852.0 $7,258.9 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable$177.9 $204.3 
Accrued liabilities376.6 423.7 
Accrued payroll and compensation248.2 242.3 
Deferred revenue3,081.2 2,848.7 
Total current liabilities3,883.9 3,719.0 
DEFERRED REVENUE2,930.5 2,886.3 
LONG-TERM DEBT993.8 992.3 
OTHER LIABILITIES135.7 124.7 
Total liabilities7,943.9 7,722.3 
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS’ EQUITY (DEFICIT):
Common stock, $0.001 par value—1,500.0 shares authorized; 765.7 and 761.0 shares issued and outstanding on September 30, 2024 and December 31, 2023, respectively
0.8 0.8 
Additional paid-in capital1,568.6 1,416.4 
Accumulated other comprehensive loss(18.0)(18.9)
Accumulated deficit(643.3)(1,861.7)
Total stockholders’ equity (deficit)
908.1 (463.4)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
$8,852.0 $7,258.9 
See notes to condensed consolidated financial statements.
3

FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited, in millions, except per share amounts)
 Three Months EndedNine Months Ended
September 30,
2024		September 30,
2023		September 30,
2024		September 30,
2023
REVENUE:
Product$473.9 $465.9 $1,334.7 $1,439.2 
Service 1,034.2 868.7 2,961.0 2,450.5 
Total revenue1,508.1 1,334.6 4,295.7 3,889.7 
COST OF REVENUE:
Product136.1 198.3 474.0 566.4 
Service 127.3 119.4 369.1 354.9 
Total cost of revenue263.4 317.7 843.1 921.3 
GROSS PROFIT:
Product337.8 267.6 860.7 872.8 
Service 906.9 749.3 2,591.9 2,095.6 
Total gross profit1,244.7 1,016.9 3,452.6 2,968.4 
OPERATING EXPENSES:
Research and development187.3 156.9 525.7 461.3 
Sales and marketing515.9 504.4 1,518.3 1,498.6 
General and administrative71.7 53.5 182.7 156.2 
Gain on intellectual property matter(1.1)(1.1)(3.4)(3.4)
Total operating expenses773.8 713.7 2,223.3 2,112.7 
OPERATING INCOME470.9 303.2 1,229.3 855.7 
INTEREST INCOME42.4 37.0 112.9 89.2 
INTEREST EXPENSE(5.0)(5.4)(15.1)(15.6)
GAIN ON BARGAIN PURCHASE
106.3 — 106.3 — 
OTHER INCOME (EXPENSE)—NET
11.8 (7.0)6.7 (11.2)
INCOME BEFORE INCOME TAXES AND LOSS FROM EQUITY METHOD INVESTMENTS
626.4 327.8 1,440.1 918.1 
PROVISION FOR (BENEFIT FROM) INCOME TAXES
81.2 (0.3)197.2 48.6 
LOSS FROM EQUITY METHOD INVESTMENTS
(5.3)(5.2)(23.9)(32.6)
NET INCOME
$539.9 $322.9 $1,219.0 $836.9 
Net income per share (Note 9):
Basic$0.71 $0.41 $1.60 $1.07 
Diluted$0.70 $0.41 $1.58 $1.05 
Weighted-average shares outstanding:
Basic765.0 781.2 763.7 783.1 
Diluted771.9 791.2 770.8 793.5 
See notes to condensed consolidated financial statements.
4
FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in millions)
 Three Months EndedNine Months Ended
 September 30,
2024		September 30,
2023		September 30,
2024		September 30,
2023
Net income
$539.9 $322.9 $1,219.0 $836.9 
Other comprehensive income (loss):
Change in foreign currency translation9.1 (2.4)(0.3)(9.9)
Change in unrealized gains (losses) on investments2.5 1.6 1.6 7.5 
Less: tax provision related to items of other comprehensive income (loss)
0.6 0.4 0.4 1.7 
Other comprehensive income (loss)
11.0 (1.2)0.9 (4.1)
Comprehensive income
$550.9 $321.7 $1,219.9 $832.8 
See notes to condensed consolidated financial statements.
5
FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited, in millions)
Three Months Ended September 30, 2024
 Common StockAdditional
Paid-In
Capital		Accumulated
Other
Comprehensive Loss		Accumulated Deficit
Total Stockholders’ Equity
SharesAmount
BALANCE—June 30, 2024
764.2 $0.8 $1,499.0 $(29.0)$(1,182.6)$288.2 
Issuance of common stock in connection with equity incentive plans - net of tax withholding1.5 — 3.7 — — 3.7 
Repurchase and retirement of common stock
— — — — (0.6)(0.6)
Stock-based compensation expense— — 65.9 — — 65.9 
Net unrealized gain on investments - net of tax
— — — 1.9 — 1.9 
Foreign currency translation adjustment— — — 9.1 — 9.1 
Net income— — — — 539.9 539.9 
BALANCE—September 30, 2024
765.7 $0.8 $1,568.6 $(18.0)$(643.3)$908.1 
Three Months Ended September 30, 2023
 Common StockAdditional
Paid-In
Capital		Accumulated
Other
Comprehensive Loss		Accumulated Deficit
Total Stockholders’ Equity
SharesAmount
BALANCE—June 30, 2023
785.6 $0.8 $1,375.9 $(23.1)$(1,032.4)$321.2 
Issuance of common stock in connection with equity incentive plans - net of tax withholding1.1 — (25.1)— — (25.1)
Repurchase and retirement of common stock
(10.4)— (15.3)— (589.9)(605.2)
Excise tax on net stock repurchases
— — (2.8)— — (2.8)
Stock-based compensation expense— — 64.3 — — 64.3 
Net unrealized gain on investments - net of tax
— — — 1.2 — 1.2 
Foreign currency translation adjustment— — — (2.4)— (2.4)
Net income
— — — — 322.9 322.9 
BALANCE—September 30, 2023
776.3 $0.8 $1,397.0 $(24.3)$(1,299.4)$74.1 
See notes to condensed consolidated financial statements.
6
Nine Months Ended September 30, 2024
Common StockAdditional
Paid-In
Capital		Accumulated
Other
Comprehensive Loss		Accumulated DeficitTotal
Stockholders’ Equity (Deficit)
SharesAmount
BALANCE—December 31, 2023
761.0 $0.8 $1,416.4 $(18.9)$(1,861.7)$(463.4)
Issuance of common stock in connection with equity incentive plans - net of tax withholding4.7 — (39.9)— — (39.9)
Repurchase and retirement of common stock
— — — — (0.6)(0.6)
Stock-based compensation expense— — 192.1 — — 192.1 
Net unrealized gain on investments - net of tax
— — — 1.2 — 1.2 
Foreign currency translation adjustment— — — (0.3)— (0.3)
Net income— — — — 1,219.0 1,219.0 
BALANCE—September 30, 2024
765.7 $0.8 $1,568.6 $(18.0)$(643.3)$908.1 
Nine Months Ended September 30, 2023
Common StockAdditional
Paid-In
Capital		Accumulated
Other
Comprehensive Loss		Accumulated DeficitTotal
Stockholders’ Equity (Deficit)
SharesAmount
BALANCE—December 31, 2022
781.5 $0.8 $1,284.2 $(20.2)$(1,546.4)$(281.6)
Issuance of common stock in connection with equity incentive plans - net of tax withholding5.2 — (54.7)— — (54.7)
Repurchase and retirement of common stock(10.4)— (15.3)— (589.9)(605.2)
Excise tax on net stock repurchases
— — (2.8)— — (2.8)
Stock-based compensation expense— — 185.6 — — 185.6 
Net unrealized gain on investments - net of tax
— — — 5.8 — 5.8 
Foreign currency translation adjustment— — — (9.9)— (9.9)
Net income
— — — — 836.9 836.9 
BALANCE—September 30, 2023
776.3 $0.8 $1,397.0 $(24.3)$(1,299.4)$74.1 
See notes to condensed consolidated financial statements.
7
FORTINET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in millions)
 Nine Months Ended
 September 30,
2024		September 30,
2023
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
$1,219.0 $836.9 
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation192.1 185.6 
Amortization of deferred contract costs218.3 195.9 
Depreciation and amortization87.6 83.2 
Amortization of investment discounts
(37.3)(16.1)
Loss from equity method investments
23.9 32.6 
Gain on bargain purchase
(106.3)— 
Other (3.3)13.7 
Changes in operating assets and liabilities, net of impact of business combinations:
Accounts receivable—net376.5 243.4 
Inventory104.9 (231.0)
Prepaid expenses and other current assets(9.0)(29.3)
Deferred contract costs(212.2)(247.5)
Deferred tax assets(187.6)(221.7)
Other assets(8.8)13.5 
Accounts payable(32.0)10.4 
Accrued liabilities(72.3)253.7 
Accrued payroll and compensation(7.9)(8.0)
Other liabilities0.5 (17.7)
Deferred revenue234.4 646.2 
Net cash provided by operating activities1,780.5 1,743.8 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments(1,485.3)(1,327.6)
Sales of investments
— 4.0 
Maturities of investments1,382.7 931.5 
Purchases of property and equipment(281.3)(177.2)
Purchase of investment in privately held company
— (8.5)
Payments made in connection with business combinations, net of cash acquired
(247.0)— 
Purchases of marketable equity securities
(16.7)— 
Other0.1 0.1 
Net cash used in investing activities
(647.5)(577.7)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase and retirement of common stock
(0.6)(604.3)
Proceeds from issuance of common stock39.7 36.0 
Taxes paid related to net share settlement of equity awards(79.6)(90.8)
Other(0.8)(1.2)
Net cash used in financing activities(41.3)(660.3)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
(0.3)(1.9)
NET INCREASE IN CASH AND CASH EQUIVALENTS
1,091.4 503.9 
CASH AND CASH EQUIVALENTS—Beginning of period1,397.9 1,682.9 
CASH AND CASH EQUIVALENTS—End of period$2,489.3 $2,186.8 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes—net $423.0 $84.9 
Operating lease liabilities arising from obtaining right-of-use assets$29.4 $14.3 
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfers of evaluation units and equipment from inventory to property and equipment
$26.1 $24.5 
Liability for purchase of property and equipment$29.1 $24.7 
Liability incurred for repurchase of common stock
$— $0.9 
See notes to condensed consolidated financial statements.
8
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 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, 2023, contained in our Annual Report on Form 10-K filed with the SEC on February 26, 2024. In the opinion of management, all adjustments, which include normal recurring adjustments, considered necessary for a fair presentation, have been included. The results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the results to be expected for the full year or for any future periods. The condensed consolidated balance sheet as of December 31, 2023 is derived from the audited consolidated financial statements for the year ended December 31, 2023.

The condensed consolidated financial statements include the accounts of Fortinet, Inc. and its subsidiaries. We consolidate all legal entities in which we have an absolute controlling financial interest. All intercompany balances and transactions have been eliminated in consolidation.

The preparation of the condensed consolidated 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 and nine months ended September 30, 2024, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the SEC.

Recent Accounting Standards Not Yet Effective

Segment Reporting

In November 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant expenses. The amendments are effective for our annual reporting for fiscal year 2024, and for our interim period reporting starting in fiscal year 2025 retrospectively, with early adoption permitted. We are currently evaluating the ASU to determine its impact on our disclosures.

Income Taxes

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which includes amendments that further enhance income tax disclosures, primarily through standardization and disaggregation of rate reconciliation categories and income taxes paid by jurisdiction. The amendments are effective for our annual period beginning fiscal year 2025, with early adoption permitted, and should be applied prospectively. We are currently evaluating the ASU to determine its impact on our disclosures.



9
FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2.     REVENUE RECOGNITION

Disaggregation of Revenue

The following table presents our revenue disaggregated by major product and service lines (in millions):
Three Months EndedNine Months Ended
September 30,
2024		September 30,
2023		September 30,
2024		September 30,
2023
Product$473.9 $465.9 $1,334.7 $1,439.2 
Service:
Security subscription595.8 494.6 1,691.4 1,373.6 
Technical support and other438.4 374.1 1,269.6 1,076.9 
Total service revenue1,034.2 868.7 2,961.0 2,450.5 
Total revenue$1,508.1 $1,334.6 $4,295.7 $3,889.7 

Deferred Revenue

During the three and nine months ended September 30, 2024, we recognized $660.3 million and $2.28 billion in revenue that was included in the deferred revenue balance as of December 31, 2023, respectively. During the three and nine months ended September 30, 2023, we recognized $514.3 million and $1.80 billion in revenue that was included in the deferred revenue balance as of December 31, 2022, respectively.

Transaction Price Allocated to the Remaining Performance Obligations

As of September 30, 2024, the aggregate amount of the transaction price allocated to remaining performance obligations was $6.08 billion, which was substantially comprised of deferred security subscription and technical support services revenue that will be recognized in future periods. We expect to recognize approximately $3.12 billion as revenue over the next 12 months and the remainder thereafter.

Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount, net of an allowance for expected credit losses. We measure expected credit losses of accounts receivable on a collective (pooled) 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 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. Expected credit losses are recorded as general and administrative expenses on our condensed consolidated statements of income.

The allowance for credit losses was $4.7 million and $8.2 million as of September 30, 2024 and December 31, 2023, respectively. Provisions, write-offs and recoveries were not material during the nine months ended September 30, 2024 and 2023.

Deferred Contract Costs
    
Amortization of deferred contract costs during the three months ended September 30, 2024 and 2023 were $73.6 million and $68.0 million, respectively. Amortization of deferred contract costs during the nine months ended September 30, 2024 and 2023 were $218.3 million and $195.9 million, respectively.

10
FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

3.     FINANCIAL INSTRUMENTS AND FAIR VALUE

Available-for-Sale Investments

The following tables summarize our available-for-sale investments (in millions):
 
 September 30, 2024
 Amortized
Cost		Unrealized
Gains		Unrealized
Losses		Fair
Value
U.S. government and agency securities$536.7 $0.8 $— $537.5 
Commercial paper434.8 0.5 — 435.3 
Corporate debt securities123.5 0.3 — 123.8 
Certificates of deposit and term deposits65.7 0.1 — 65.8 
Total available-for-sale investments
$1,160.7 $1.7 $— $1,162.4 
 December 31, 2023
 Amortized
Cost		Unrealized
Gains		Unrealized
Losses		Fair
Value
U.S. government and agency securities$461.5 $0.2 $(0.3)$461.4 
Commercial paper401.7 0.2 (0.1)401.8 
Corporate debt securities70.0 0.1 (0.1)70.0 
Certificates of deposit and term deposits88.2 0.1 — 88.3 
Total available-for-sale investments
$1,021.4 $0.6 $(0.5)$1,021.5 
The following tables show the gross unrealized losses and the related fair values of our available-for-sale investments that have been in a continuous unrealized loss position (in millions):
September 30, 2024
 Less Than 12 Months12 Months or GreaterTotal
Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
U.S. government and agency securities$40.2 $— $— $— $40.2 $— 
Commercial paper60.8 — — — 60.8 — 
Corporate debt securities15.8 — — — 15.8 — 
Total available-for-sale investments
$116.8 $— $— $— $116.8 $— 

December 31, 2023
 Less Than 12 Months12 Months or GreaterTotal
 Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
U.S. government and agency securities$47.1 $— $11.7 $(0.3)$58.8 $(0.3)
Commercial paper200.8 (0.1)— — 200.8 (0.1)
Corporate debt securities21.8 — 26.9 (0.1)48.7 (0.1)
Total available-for-sale investments
$269.7 $(0.1)$38.6 $(0.4)$308.3 $(0.5)

11
FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The contractual maturities of our investments were (in millions):
 September 30,
2024		December 31,
2023
Due within one year$1,162.4 $1,021.5 
Due within one to three years— — 
Total$1,162.4 $1,021.5 

Available-for-sale investments are reported at fair value, with unrealized gains and losses and the related tax impact included as a separate component of stockholders’ equity (deficit) and in comprehensive income. We do not intend to sell any of the securities in an unrealized loss position and it is not more likely than not that we would be required to sell these securities before recovery of their amortized cost basis, which may be at maturity.

Realized gains and losses on available-for-sale investments were insignificant in the periods presented.

Marketable Equity Securities

Our marketable equity securities were $49.0 million and $21.0 million as of September 30, 2024 and December 31, 2023. The changes in fair value of our marketable equity securities are recorded in other income (expense)—net on the condensed consolidated statements of income. We recognized a $11.1 million and $11.2 million gain during the three and nine months ended September 30, 2024, respectively. We recognized a $2.3 million and $5.7 million loss during the three and nine months ended September 30, 2023, respectively.

Fair Value of Financial Instruments

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:

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, certain U.S. government and agency securities and marketable equity 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.

12
FORTINET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 (in millions):
 September 30, 2024December 31, 2023
 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:
U.S. government and agency securities$545.0 $530.2 $14.8 $— $501.4 $433.3 $68.1 $— 
Commercial paper473.0 — 473.0 — 472.2 — 472.2 — 
Corporate debt securities123.8 — 123.8 — 73.0 — 73.0 — 
Certificates of deposit and term deposits67.6 — 67.6 — 104.8 — 104.8 — 
Money market funds256.0 256.0 — — 277.1 277.1 — — 
Marketable equity securities49.0 49.0 — — 21.0 21.0 — — 
Total$1,514.4 $835.2 $679.2 $— $1,449.5 $731.4 $718.1 $— 
Reported as:
Cash equivalents$303.0 $407.0 
Marketable equity securities49.0 21.0 
Short-term investments1,162.4 1,021.5 
Total$1,514.4 $1,449.5 

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 2024 and year ended December 31, 2023.

4.     INVENTORY

Inventory, net of reserves, consisted of (in millions):
 September 30,
2024		December 31,
2023
Raw materials$99.2 $92.1 
Work in process5.4 7.7 
Finished goods249.7 385.0 
Inventory$354.3 $484.8 

The excess and obsolete inventory reserve was $132.8 million and $89.2 million as of September 30, 2024 and December 31, 2023, respectively. Inventory write-downs related to excess and obsolete inventory were $8.8 million and $37.6 million for the three and nine months ended September 30, 2024, respectively, and were $10.0 million and $22.3 million for the three and nine months ended September 30, 2023, respectively. These were recorded in cost of product revenue on the condensed consolidated statements of income.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5.     PROPERTY AND EQUIPMENT—Net

Property and equipment—net consisted of (in millions):
 
 September 30,
2024		December 31,
2023
Land$462.6 $351.7 
Buildings and improvements738.4 595.5 
Computer equipment and software278.7 261.1 
Leasehold improvements65.5 61.4 
Evaluation units32.7 30.8 
Furniture and fixtures36.5 33.6 
Construction-in-progress72.5 63.3 
Total property and equipment1,686.9 1,397.4 
Less: accumulated depreciation(413.5)(353.0)
Property and equipment—net$1,273.4 $1,044.4 

During the first three quarters in 2024, we purchased certain real estate properties in California, United States and Alberta, Canada, for an aggregate purchase price of $229.3 million, to be used predominantly for research and development, warehousing, datacenter operations and sales and support functions. The purchases were accounted for under the asset acquisition method. The cost of the assets allocated to land, buildings and improvements, and furniture and fixtures were $111.0 million, $117.4 million, and $0.9 million , respectively, based on their relative fair values.

Depreciation expense was $24.5 million and $23.9 million during the three months ended September 30, 2024 and 2023, respectively. Depreciation expense was $76.0 million and $69.6 million during the nine months ended September 30, 2024 and 2023, respectively.

6.     INVESTMENT IN PRIVATELY HELD COMPANY

Linksys Holdings, Inc.

During 2021, we invested $160.0 million in cash for shares of the Series A Preferred Stock of privately held Linksys Holdings, Inc. (“Linksys”), for a 50.8% ownership interest in outstanding equity of Linksys. As of September 30, 2024 and December 31, 2023, our ownership interest remained the same. Linksys provides router connectivity solutions to the consumer and small business markets.

We have concluded that our investment in Linksys is an in-substance common stock investment and that we do not hold an absolute controlling financial interest in Linksys, but that we have the ability to exercise significant influence over the operating and financial policies of Linksys. Therefore, we determined to account for this investment using the equity method of accounting. We record our share of Linksys’ financial results on a three-month lag basis, with the exception of material transactions or events that occur during the intervening period that materially affect the financial position or results of operations. We determined that there was a basis difference between the cost of our investment in Linksys and the amount of underlying equity in net assets of Linksys.

Due to the presence of impairment indicators, such as a series of operating losses, we evaluated our equity method investment for an other-than-temporary impairment (“OTTI”) during the third quarter of 2024. We considered various factors in determining whether an OTTI has occurred, including Linksys’ financial results, operating history, our ability and intent to hold the investment until its fair value recovers, the implied revenue valuation multiples compared to guideline public companies, the discounted cash flows analysis, Linksys’ ability to achieve milestones and any notable operational and strategic changes. After the evaluation, we determined that an additional OTTI had not occurred as of September 30, 2024. However, we may be required to recognize an impairment loss in future reporting periods if and when our evaluation of the aforementioned factors indicates that the investment in Linksys is determined to be other than temporarily impaired. Such determination will be based on the prevailing facts and circumstances at that time, including the results and disclosures of Linksys.

Our share of loss of Linksys’ financial results, as well as our share of the amortization of the basis differences, totaled $5.2 million for the three months ended September 30, 2024. Our loss from our Linksys investment totaled $23.4 million for the
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

nine months ended September 30, 2024, which comprised of our proportionate share of Linksys’ financial results and the amortization of the basis differences of $15.4 million, as well as an OTTI charge of $8.0 million recognized in the second quarter of 2024. Our share of loss of Linksys’ financial results, as well as our share of the amortization of the basis differences, totaled $5.2 million and $32.6 million for the three and nine months ended September 30, 2023, respectively.

These losses and the OTTI charge were recorded in loss from equity method investments on the condensed consolidated statements of income. The carrying amount of our Linksys investment was $18.8 million and $42.2 million as of September 30, 2024 and December 31, 2023, respectively, and the investment was included in other assets on our condensed consolidated balance sheets.

7.     BUSINESS COMBINATIONS

Lacework Inc.

On August 1, 2024, we closed an acquisition of Lacework Inc. (“Lacework”), a privately held data-driven cloud security company, for $152.3 million in cash. We acquired Lacework with a goal of offering its Cloud-Native Application Protection Platform (“CNAPP”) solution separately as well as integrated with our existing portfolio, forming a comprehensive, AI-driven cloud security platform available from a single vendor, which will help customers identify, prioritize, and remediate risks and threats in complex cloud-native infrastructure from code to cloud.

Under the acquisition method of accounting in accordance with ASC 805, the total preliminary purchase price was allocated to Lacework’s identifiable tangible and intangible assets acquired and liabilities assumed based on their estimated fair values using management’s best estimates and assumptions to assign fair value as of the acquisition date. The following table provides the assets acquired and liabilities assumed as of the date of acquisition:
(in millions)
Estimated Fair Value
ASSETS
Cash
$6.2 
Accounts receivable—net14.8 
Prepaid expenses and other current assets
9.6 
Deferred tax assets
244.4 
Other intangible assets61.3 
TOTAL ASSETS$336.3 
LIABILITIES
Accounts payable
$2.5 
Deferred revenue
37.5 
Accrued payroll and compensation
12.0 
Accrued and other current liabilities
25.5 
Other liabilities
0.2 
TOTAL LIABILITIES$77.7 
Gain on bargain purchase
$106.3 
Net purchase consideration$152.3 

The excess of the fair values of the net assets acquired over the net purchase consideration was recorded as a gain on bargain purchase within other income, net on the condensed consolidated statements of income. The gain on bargain purchase occurred primarily due to the recognition of the deferred tax assets. The deferred tax assets were comprised primarily of pre-acquisition federal net operating loss carryforwards with an indefinite carryforward period.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Identified intangible assets acquired and their estimated useful lives (in years) as of August 1, 2024, were as follows (in millions, except years):

Fair ValueEstimated Useful Life (in years)
Developed technology (1)
$39.5 5.0
Customer relationships7.5 5.0
Trade name4.3 5.0
Backlog10.0 3.0
Total identified intangible assets:$61.3 
(1) Developed technology is Lacework’s CNAPP solution. We valued the developed technology using the relief-from-royalty method under the income approach. This method reflects the present value of the projected cash flows that are expected to be generated by the developed technology. The economic useful life was determined based on the technology cycle as well as the cash flows over the forecast period.

Our estimates and assumptions are subject to change within the measurement period, which is up to 12 months after the acquisition date. The allocation of the purchase price for this acquisition has been prepared on a preliminary basis and changes to the allocation of certain assets and liabilities may occur as additional information becomes available. The primary area of the purchase price that is not yet finalized is related to income taxes.

The operating results of the acquired company were included in our condensed consolidated financial statements from the date of acquisition, which was August 1, 2024. For the period from August 2, 2024 through September 30, 2024, Lacework contributed revenue of $12.9 million and a net loss of $21.6 million. Acquisition-related costs for this acquisition were not material and were recorded as general and administrative expense.

Next DLP Holdings Limited

On August 5, 2024, we completed the acquisition of Next DLP Holdings Limited (“Next DLP”), a privately held insider risk and data loss prevention (“DLP”) company, for approximately $105.0 million in cash. We acquired Next DLP to improve our position in the standalone enterprise DLP market and strengthen our leadership in integrated DLP markets within endpoint and SASE.

This acquisition was accounted for as a business combination using the acquisition method of accounting. The total preliminary purchase price was allocated to Next DLP’s identifiable tangible and intangible assets acquired and liabilities assumed based on their estimated fair values using management’s best estimates and assumptions to assign fair value as of the acquisition date. Of the total preliminary purchase price, $82.6 million was allocated to goodwill, $13.5 million was allocated to developed technology intangible asset, $10.5 million was allocated to customer relationships intangible asset, offset by $1.6 million of net liabilities assumed, which predominantly included deferred revenue and deferred tax liabilities. Goodwill recorded in connection with this acquisition represents the value we expect to be created through expansion into markets within our existing business, and the anticipated operational synergies, and goodwill is not expected to be deductible for tax purposes. Acquisition-related costs related to this acquisition were not material and were recorded as general and administrative expense.

Our estimates and assumptions are subject to change within the measurement period, which is up to 12 months after the acquisition date. The allocation of the purchase price for this acquisition has been prepared on a preliminary basis and changes to the allocation of certain assets and liabilities may occur as additional information becomes available. The primary areas of the purchase price that are not yet finalized are related to income taxes and the valuation of acquired assets and assumed liabilities.

Pro Forma Financial Information

The following unaudited pro forma financial information presents the combined results of operations of Fortinet, Inc., Lacework and Next DLP, as if Lacework and Next DLP had been acquired as of the beginning of business on January 1, 2023. The unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of our consolidated results of operations of the combined business that would have been achieved if the acquisitions had taken place at the beginning of business on January 1, 2023, or of the results of our future operations of the combined business. The
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

following unaudited pro forma financial information for all periods presented includes purchase accounting adjustments for amortization of acquired intangible assets, the gain on bargain purchase, and various related tax impacts (in millions):

Three Months EndedNine Months Ended
September 30,
2024		September 30,
2023		September 30,
2024		September 30,
2023
Pro forma revenue
$1,517.8 $1,358.9 $4,357.4 $3,964.2 
Pro forma net income
$349.6 $267.0 $928.7 $758.3 

8.     GOODWILL AND OTHER INTANGIBLE ASSETS—Net

Goodwill

The following table presents the changes in the carrying amount of goodwill (in millions):
Amount
Balance—December 31, 2023
$126.5 
Additions due to business combinations
86.5 
Foreign currency translation adjustments(0.2)
Balance—September 30, 2024
$212.8 

There were no impairments to goodwill during the nine months ended September 30, 2024 or during prior periods.

Other Intangible Assets—Net

The following tables present other intangible assets—net (in millions, except years):
September 30, 2024
 Weighted-Average Useful Life (in Years)GrossAccumulated AmortizationNet
Other intangible assets—net:
Finite-lived intangible assets:
Developed technologies4.4$134.4 $68.5 $65.9 
Customer relationships5.849.0 20.7 28.3 
Trade name7.79.2 1.6 7.6 
Backlog2.413.9 4.1 9.8 
Total other intangible assets—net$206.5 $94.9 $111.6 
December 31, 2023
 Weighted-Average Useful Life (in Years)GrossAccumulated AmortizationNet
Other intangible assets—net:
Finite-lived intangible assets:
Developed technologies4.4$79.4 $60.6 $18.8 
Customer relationships7.130.4 17.7 12.7 
Trade name10.05.0 1.2 3.8 
Backlog1.03.9 3.9 — 
Total other intangible assets—net$118.7 $83.4 $35.3 

Amortization expense was $5.3 million and $4.4 million during the three months ended September 30, 2024 and 2023, respectively. Amortization expense was $11.6 million and $13.6 million during the nine months ended September 30, 2024 and 2023, respectively.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


The following table summarizes estimated future amortization expense of finite-lived intangible assets—net (in millions):
 Amount
Years:
2024 (the remainder of 2024)
$9.6 
202534.2 
202623.6 
202719.0 
202813.3 
Thereafter11.9 
Total$111.6 

9.     NET INCOME PER SHARE

Basic net income per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period, plus the dilutive effects of restricted stock units (“RSUs”), stock options and performance stock units (“PSUs”). Dilutive shares of common stock are determined by applying the treasury stock method.

A reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per share is (in millions, except per share amounts):
 Three Months EndedNine Months Ended
 September 30,
2024		September 30,
2023		September 30,
2024		September 30,
2023
Numerator:
Net income
$539.9 $322.9 $1,219.0 $836.9 
Denominator:
Basic shares:
Weighted-average common stock outstanding-basic765.0 781.2 763.7 783.1 
Diluted shares:
Weighted-average common stock outstanding-basic765.0 781.2 763.7 783.1 
Effect of potentially dilutive securities:
RSUs 2.0 3.5 2.1 3.8 
Stock options4.4 6.2 4.7 6.4 
PSUs0.5 0.3 0.3 0.2 
Weighted-average shares used to compute diluted net income per share
771.9 791.2 770.8 793.5 
Net income per share
Basic$0.71 $0.41 $1.60 $1.07 
Diluted$0.70 $0.41 $1.58 $1.05 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following weighted-average shares of common stock were excluded from the computation of diluted net income per share for the periods presented, as their effect would have been antidilutive (in millions):
 Three Months EndedNine Months Ended
 September 30,
2024		September 30,
2023		September 30,
2024		September 30,
2023
RSUs 0.4 — 0.2 0.6 
Stock options3.1 3.0 3.3 2.8 
PSUs— — 0.1 — 
Total 3.5 3.0 3.5 3.4 

10.     DEBT

2026 and 2031 Senior Notes

On March 5, 2021, we issued $1.0 billion aggregate principal amount of senior notes (collectively, the “Senior Notes”), consisting of $500.0 million aggregate principal amount of 1.0% notes due March 15, 2026 (the “2026 Senior Notes”) and $500.0 million aggregate principal amount of 2.2% notes due March 15, 2031 (the “2031 Senior Notes”), in an underwritten registered public offering. The Senior Notes are senior unsecured obligations and rank equally with each other in right of payment and with our other outstanding obligations. We may redeem the Senior Notes at any time in whole or in part for cash, at specified redemption prices that include accrued and unpaid interest, if any, and a make-whole premium. However, no make-whole premium will be paid for redemptions of the 2026 Senior Notes on or after February 15, 2026, or the 2031 Senior Notes on or after December 15, 2030. Interest on the Senior Notes is payable on March 15 and September 15 of each year, beginning on September 15, 2021. As of September 30, 2024 and December 31, 2023, the Senior Notes were recorded as long-term debt, net of discount and issuance costs, which are amortized to interest expense over the respective contractual terms of these notes using the effective interest method.

The total outstanding debt is summarized below (in millions, except percentages):
 MaturityCoupon RateEffective Interest RateSeptember 30,
2024		December 31,
2023
Debt
2026 Senior NotesMarch 20261.0%1.3%$500.0 $500.0 
2031 Senior NotesMarch 20312.2%2.3%500.0 500.0 
Total debt1,000.0 1,000.0 
Less: Unamortized discount and debt issuance costs6.2 7.7 
Total long-term debt$993.8 $992.3 

As of September 30, 2024 and December 31, 2023, we accrued interest payable of $0.7 million and $4.7 million, respectively, and there are no financial covenants with which we must comply. During the three months ended September 30, 2024 and 2023, we recorded $4.5 million of total interest expense in relation to these Senior Notes in each period. During the nine months ended September 30, 2024 and 2023, we recorded $13.5 million of total interest expense in relation to these Senior Notes in each period. No interest costs were capitalized for the nine months ended September 30, 2024 and 2023, as the costs that qualified for capitalization were not material.

The total estimated fair value of the outstanding Senior Notes was approximately $912.8 million, including accrued and unpaid interest, as of September 30, 2024. The fair value was determined based on observable market prices of identical instruments in less active markets. The estimated fair values are based on Level 2 inputs.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

11.     COMMITMENTS AND CONTINGENCIES